**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-K**

**x**                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31, 2006**

**OR**

**o**                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from                        to                       **

CommissionFile No. 1-12248

**KAISER GROUP HOLDINGS, INC.**

**(successorissuer to Kaiser Group International, Inc.)**

(Exactname of registrant as specified in its charter)

**Delaware**

(State or other jurisdiction of incorporationor organization)

**54-2014870**

(I.R.S. Employer IdentificationNo.)

| **9300 Lee Highway, Fairfax, Virginia**   |   | **22031-1207** |
|-------------------------------------------|--------|----------------|
| (Address of  principal executive offices) |   | (Zip Code)     |

 

**Registrant’s telephone number including area code: (703) 934-3413**

Securities registered pursuantto Section 12(b) of the Act:

|                          | ** ** | **Name of  Exchange on** |
|--------------------------|------------|--------------------------|
| **Title  of Each Class** | ** ** | **which  Registered**    |
| None                     |       | None                     |

 

Securities registered pursuant to Section 12(g) of the Act:

**Common Stock, par value $0.01per share**

**(Title of class)**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined byRule 405 of the Securities Act. Yes o   No x

Indicateby checkmark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Act. Yes o   No x

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x   No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer o      Accelerated filer o   Non-acceleratedfiler x

Indicateby check mark whether the registrant is a shell company (as defined by Rule12b-2 of the Act.)  Yes o   No x

Theaggregate market value of the voting common equity held by non-affiliates as ofJune 30, 2006, based on the closing sales price of the Common Stock as quotedon the Pink Sheets, was $27,830,394.00. For purposes of this computation, allofficers, directors, and 5 percent beneficial owners of the registrant aredeemed to be affiliates.  Suchdetermination should not be deemed an admission that such directors, officers,or 5 percent beneficial owners are, in fact, affiliates of the registrant.

Asof March 20, 2007, there were 1,790,890 shares of Common Stock outstanding.

**APPLICABLEONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDINGFIVE YEARS:**

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed bya court.  Yes x   No o

ThePlan of Reorganization of Kaiser Group International, Inc. under Chapter 11 ofthe Bankruptcy Code became effective on December 18, 2000.  The Plan provides, among other things, thatholders of shares of common stock of Kaiser Group International, Inc. receivedshares of common stock of Kaiser Group Holdings, Inc. and that holders ofspecified outstanding debt obligations and other specified claimants receivedcash and shares of preferred stock and common stock of Kaiser Group Holdings,Inc., all in accordance with the terms set forth in the Plan. The initialdistribution of securities occurred as of April 17, 2001.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the registrant’sdefinitive proxy statement for the registrant’s 2007 Annual Meeting of Stockholdersare incorporated by reference in Part III of this Annual Report onForm 10-K.

 

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**TABLE OF CONTENTS**
|              | ** ** | ** **                                                                                                         | ** ** | **PAGE** | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   |       |
| ** **   |       |                                                                                                               |       |
| Item 1.      |       | Business                                                                                                           |       | 1        |       |
| Item 1A.     |       | Risk  Factors                                                                                                      |       | 5        |       |
| Item 1B.     |       | Unresolved Staff Comments                                                                                          |       | 7        |       |
| Item 2.      |       | Properties                                                                                                         |       | 8        |       |
| Item 3.      |       | Legal  Proceedings                                                                                                 |       | 8        |       |
| Item 4.      |       | Submission of Matters to a Vote of Security Holders                                                                |       | 8        |       |
|         |       |                                                                                                               |       |     |       |
| **PART II**  |       |
| ** **   |       |                                                                                                               |       |
| Item 5.      |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 8        |       |
| Item 6.      |       | Selected Consolidated Financial Data                                                                               |       | 10       |       |
| Item 7.      |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       | 10       |       |
| Item 7A.     |       | Quantitative and Qualitative Disclosures about Market  Risk                                                        |       | 18       |       |
| Item 8.      |       | Financial Statements and Supplementary Data                                                                        |       | 18       |       |
| Item 9.      |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosures                             |       | 18       |       |
| Item 9A.     |       | Controls and Procedures                                                                                            |       | 18       |       |
| Item 9B.     |       | Other  Information                                                                                                 |       | 18       |       |
|         |       |                                                                                                               |       |     |       |
| **PART III** |       |
| ** **   |       |                                                                                                               |       |
| Item 10.     |       | Directors and Executive Officers and Corporate  Governance                                                         |       | 19       |       |
| Item 11.     |       | Executive Compensation                                                                                             |       | 19       |       |
| Item 12.     |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       | 19       |       |
| Item 13.     |       | Certain Relationships and Related Transactions, and  Director Independence                                         |       | 19       |       |
| Item 14.     |       | Principal Accounting Fees and Services                                                                             |       | 20       |       |
|         |       |                                                                                                               |       |     |       |
| **PART IV**  |       |
| ** **   |       |                                                                                                               |       |
| Item 15.     |       | Exhibits, Financial Statement Schedules                                                                            |       | 21       |       |
|         |       |                                                                                                               |       |     |       |
|         |       | Signatures                                                                                                         |       | 26       |       |

 

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**PART I**

**Item 1.**                          Business

**CorporateHistory; Overview**

Kaiser Group Holdings,Inc. (“Kaiser Group Holdings” or the “Company”) is a Delaware corporation thatwas formed on December 6, 2000 for the purpose of owning all of the outstandingstock of Kaiser Group International, Inc. (“Old Kaiser”), which in turncontinues to own the stock of its remaining subsidiaries. On June 9, 2000, OldKaiser and 38 of its domestic subsidiaries voluntarily filed for protectionunder Chapter 11 of the United States Bankruptcy Code in the District ofDelaware (case nos. 00-2263 to 00-2301). Old Kaiser emerged from bankruptcywith an approved plan of reorganization (which was its Second Amended Plan ofReorganization and is referred to in this report as the “Plan of Reorganization”)that was effective on December 18, 2000 (the “Effective Date”).  The Company is deemed a “successor issuer” toOld Kaiser by virtue of Rule 12g-3(a) under the Securities Exchange Act of1934. A summary of the Plan of Reorganization for Old Kaiser can be found in aCurrent Report on Form 8-K dated December 5, 2000 filed by Old Kaiser.  In thisreport, unless the context states otherwise, the terms “we”, “our” and “Kaiser”refer to Kaiser Group Holdings (including Old Kaiser as its predecessor) andits subsidiaries.

Under the Plan of Reorganization, Old Kaiser sold someof its businesses and made payments of cash and stock to various classes ofcreditors as described in Note 2 to our consolidated financial statementsappearing elsewhere in this report.  We nowhave only a limited number of activities, assets and liabilities, primarilyconsisting of the following:

·                  Weown Kaiser-Hill Company, LLC (“Kaiser-Hill”) equally with CH2M Hill CompaniesLtd (“CH2M Hill”).  Kaiser-Hill serves asthe general contractor at the U.S. Department of Energy’s (“DOE” or “Departmentof Energy”) Rocky Flats site near Denver, Colorado.  Kaiser-Hill has performed for the Departmentof Energy at this site since 1995 and in January 2000 was awarded a contract tomanage the closure of the site. Kaiser-Hill now operates under the closeout phase of the DOE Rocky FlatsClosure Contract, primarily resolving open administrative issues and providingsupport to the DOE to achieve regulatory closure of the site.  The closeout phase of the Closure Contract isa cost reimbursable phase and is not fee- bearing; the Company does not expectthat the closeout phase will impact fees earned.   See “— Kaiser-Hill” below for additionalinformation.

·                  We have claims, pending resolution in the UnitedStates Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”),against the owner of a steel mini-mill that we constructed for Nova Hut, a.s.(now known as Mittal Steel Ostrava, a.s.) (“Nova Hut”) in the Czech Republicand against the International Finance Corporation, which provided financing forthe mini-mill project.  The engineeringand construction of the mini-mill was completed in 2000 by our subsidiary,Kaiser Netherlands, B.V.  See “— Nova Hut”below for additional information about our Nova Hut claims.

·                  We own a captive insurance company that ceased toissue new policies as of October 1, 2000 and has, since then, solely beeninvolved in resolving remaining claims made against previously issuedpolicies.  In the fourth quarter of 2004,we received regulatory approval and finalized the formation documents of asponsored captive subsidiary, MS Builders Insurance Company, to enable ourwholly-owned captive insurance company to offer derivative captive insuranceservices to third party clients.  As ofMarch 20, 2007, MS Builders Insurance Company has not written any policies.

·                  We have an ongoing obligation to fund a cappedpost-employment medical benefit plan for a fixed group of retirees.

Kaiser Analytical ManagementServices, Inc. (“KAMS”) accounted for all of the Company’s annual gross revenuein 2006, all of which were earned in the first half of 2006.  Under prevailing market conditions, theCompany determined that there were insufficient business prospects for KAMS to expectfuture revenues from this source.  KAMSwas formed in April 2004 to take over the operations of the AnalyticalServices Division of Kaiser-Hill.  KAMSprovided analytical management services such as sample planning, samplemanagement, records management, performance assessment and data management inthe general areas of health and safety, geotechnical, environmental and wastemanagement, and deactivation and decommissioning.  See “Kaiser Analytical Management Services,Inc.” below for additional information.

**General Terms and Distribution Status of Plan of Reorganization**

The effectiveness of thePlan of Reorganization as of December 18, 2000 did not, in and of itself,complete the bankruptcy process. The process of resolving claims initiallyfiled in the bankruptcy is ongoing. By far the largest class of claims (“Class4”) was made up of creditor claims other than trade creditor or equityclaims.  Class 4 claims included holdersof Old Kaiser’s senior subordinated notes due 2003.  Holders of Class 4 claims allowed by theBankruptcy Court received a combination of cash and our preferred (“NewPreferred”) and common stock (“Kaiser Common Stock”) in respect of theirclaims.  Each Class

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4 claimant was entitledto receive one share of New Preferred and one share of Kaiser Common Stock foreach $100 of claims, subject to a reduction in the number of shares of NewPreferred issued to such claimant by one share for each $55.00 of cash receivedby the claimant.

The equity class ofclaims recognized in the Old Kaiser bankruptcy are “Class 5” claims, consistingof holders of Old Kaiser common stock (“Old Common”) and other “EquityInterests” as defined in the Plan of Reorganization. The Plan of Reorganizationprovides that holders of Equity Interests receive a number of shares of KaiserCommon Stock equal to 17.65% of the number of shares of Kaiser Common Stockissued to allowed Class 4 claimants. In the initial distribution, one share ofKaiser Common Stock was issued for each 96 shares of previously outstanding OldCommon.  During 2005, the Company settleda significant Class 5 claim asserted by the former stockholders of ICT SpectrumConstructors, Inc. (“ICT Spectrum”), which Old Kaiser had acquired in 1998, andissued an aggregate of 175,003 additional shares of Kaiser Common Stock to suchclaimants pursuant to the settlement. See Note 9 to the consolidated financial statements appearing elsewherein this report for additional information.

Pursuant to the terms ofthe Plan of Reorganization, the Company was required to complete its initialbankruptcy distribution within 120 days of the Effective Date.  Accordingly, to satisfy approximately $136.8million of allowed Class 4 claims, the Company effected its initialdistribution on April 17, 2001.  Theamount of unresolved Class 4 claims remaining at April 17, 2001 wasapproximately $130.5 million.

To address the remainingunresolved claims, the Bankruptcy Court issued an order on March 27, 2001establishing an Alternative Dispute Resolution (“ADR”) procedure whereby theremaining claimants and Old Kaiser produced limited supporting data relative totheir respective positions and engaged in initial negotiation efforts in an attemptto reach an agreed claim determination. If necessary, the parties were thereafter required to participate in anon-binding mediation before a mediator pre-selected by the Bankruptcy Court.  All unresolved claims as of March 27, 2001are subject to the ADR process. Since April 17, 2001, the date of the initialdistribution, $130.0 million of asserted Class 4 claims have been withdrawn,negotiated or mediated to an agreed amount, resulting in cash paymentsapproximating $2.8 million and issuances of 683 shares of New Preferred and 823shares of Kaiser Common Stock.  With thesettlement of the ICT Spectrum Class 5 claim and the subsequent issuance of175,003 shares of Kaiser Common Stock to such claimants, at March 20, 2007,there are no remaining unresolved Class 5 claims.

As of March 20, 2007, theaggregate amount of unresolved claims was approximately $0.4 million.  As demonstrated by the claim settlementscompleted since April 17, 2001, and based on the belief that it is in the bestinterest of the Company and its current stockholders, the Company has beensettling certain remaining Class 4 claims entirely for cash payments in lieu ofthe combination of cash and New Preferred and Kaiser Common Stock ascontemplated in the Plan of Reorganization. The Company intends to continue to use this settlement alternativeduring the resolution of remaining Class 4 claims.  The Company expects to resolve the remainingclaims, and to reach a final resolution of issues related to the retireebenefit plans (see Note 12 to our consolidated financial statements appearingelsewhere in this report), by the end of the second quarter of 2007.   Upon such final resolution, the Companyexpects to take the necessary steps to close the bankruptcy cases.  Upon such closing, the Bankruptcy Court wouldno longer be involved in the administration of the Company’s affairs, and theCompany’s obligation to pay certain fees and submit periodic reports to theBankruptcy Court would be terminated. Since closing the cases requires a resolution of all outstanding mattersand such resolution is somewhat out of the Company’s control, there is apossibility that the cases will not be closed within the anticipated timeperiod.

In the first quarter of2004, the Company recorded a $1.4 million reserve for future claim settlementsbased upon the Company’s estimate of unresolved claims at that time.  Since 2004, the Company has settled variousClass 4 claims utilizing approximately $1.0 million of this reserve.  Based upon the Company’s estimate ofunresolved claims at December 31, 2006, $0.4 million remains in this reserve.

**Kaiser-Hill**

The primarysource of the Company’s income has historically been our 50% ownership interestin Kaiser-Hill.  The remaining 50%interest is owned by CH2M Hill.  Kaiser-Hillwas formed solely for the performance of the current and former Rocky Flatsclosure contracts.  CH2M Hill designates three of the five membersof Kaiser-Hill’s Board of Managers, and we designate two members.

Kaiser-Hill currently serves as thegeneral contractor at the U.S. Department of Energy’s Rocky Flats site nearDenver, Colorado. Kaiser-Hill has performed clean up and closure activitiessince 1995 at this site, a former DOE nuclear weapons production facility.  The level of success experienced byKaiser-Hill in achieving timely closure of the Rocky Flats site, and the costof achieving such closure, have been the primary determinants of the Company’sfinancial performance.

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Effective February 1, 2000, Kaiser-Hill was awarded a new contract pursuantto which Kaiser-Hill has provided services to complete the restoration of theRocky Flats site and close it to DOE occupation.  The economic terms of the contract providefor Kaiser-Hill to earn revenue equal to the actual cost of completing theproject plus a performance fee based on a combination of factors involving theactual cost of completing the site closure project and the actual date ofcompleting the project.

On March 20, 2004, Kaiser-Hill received a contractmodification to motivate safe continuing positive performance by increasing themaximum fee ceiling that Kaiser-Hill could earn under the contract.  The same contract modification reduced theminimum fee floor and included other provisions related to work scopechanges.  The total potential fee to beearned pursuant to the contract, as modified ranged from $75.0 million to $560.0 million based onKaiser-Hill’s costs to complete the site closure being within the range ofcompletion costs of $3.1 billion and $4.9 billion, and completion at variousdates between 2005 and 2007.  For projectcosts saved below a target level, Kaiser-Hill retains a varying percentageshare ranging from 20% to 30% as additional incentive fee.  Similarly, for project costs incurred above atarget level, Kaiser-Hill’s incentive fee is reduced by 30%.

OnOctober 13, 2005, Kaiser-Hill declared physical completion of the clean up andclosure of the DOE’s Rocky Flats site. On December 8, 2005, the DOE accepted the physical completion inaccordance with the contract.  Theprojected total fee to be earned pursuant to the contract is $510.9 millionbased on a Kaiser-Hill cost to complete the site closure of $3.44 billion.   As of March 20, 2007, Kaiser-Hill hadreceived $510.8 million of such fee from the DOE.

Kaiser-Hill now operates under the closeout phase of itscontract with the DOE, primarily resolving open administrative issues andproviding support to the DOE to achieve regulatory closure of the site.  The closeout phase of the contract is a costreimbursable phase and is not fee-bearing; the Company does not expect that thecloseout phase will impact fees earned. See Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” for further discussion of the Closure Contract.

Underthe Closure Contract, Kaiser-Hill is not responsible for, and the DOE pays allcosts associated with any liability, including, without limitation, any claimsinvolving strict or absolute liability and any civil fine or penalty, expenseor remediation cost, but limited to those of a civil nature, which may beincurred by, imposed on, or asserted against Kaiser-Hill arising out of any actor failure to act, condition or exposure which occurred before Kaiser-Hillassumed responsibility on July 1, 1995 (“pre-existing conditions”). To theextent the acts or omissions of Kaiser-Hill constitute willful misconduct, lackof good faith, or failure to exercise prudent business judgment on the part ofKaiser-Hill’s managerial personnel and cause or add to any liability, expense,or remediation cost resulting from pre-existing conditions, Kaiser-Hill isresponsible, but only for the incremental liability, expense or remediationcaused by Kaiser-Hill.

The ClosureContract further provides that Kaiser-Hill will be reimbursed for thereasonable cost of bonds and insurance allocable to the contract and forliabilities and expenses incidental to these liabilities, including litigationcosts, to third parties not compensated by insurance or otherwise. There is anexception to this reimbursement provision applicable to liabilities caused bythe willful misconduct, lack of good faith or failure to exercise prudentbusiness judgment by Kaiser-Hill’s managerial personnel.

**Nova Hut**

Although OldKaiser sold its Metals Mining and Industry business unit in August 2000, itretained its Netherlands subsidiary, Kaiser Netherlands, B.V. (“KaiserNetherlands”), which had been responsible for a turnkey engineering andconstruction services contract for the construction of a steel mini-mill in theCzech Republic for Nova Hut.  Afterconstruction of the mini-mill was completed in 2000, the contract with Nova Hutprovided for a maximum of three possible performance tests. The firstperformance test was completed on November 13, 2000. Kaiser Netherlandsbelieves that the first performance test was successful and that Nova Hutshould have agreed to final acceptance of the mini-mill and made final paymentof amounts accrued by Kaiser Netherlands throughout the project, including feeand retention amounts with release of performance guarantee instruments.  Nova Hut, however, asserted that the firsttest was not successful. Kaiser Netherlands believes that such contention mayhave been put forth in response to severe financial constraints on Nova Hut’s operationsresulting from weakening conditions in the worldwide steel market and thesignificant amounts that Kaiser Netherlands believed it was contractually due.

Initially, from2001 to 2005, the primary legal venue of this dispute was the bankruptcy proceedingfor Old Kaiser, where the Company has asserted claims against Nova Hut and theInternational Finance Corporation (“IFC”). Both Nova Hut and IFC filed various motions to dismiss the Company’sclaims. The Bankruptcy Court originally denied these motions.  Both Nova Hut and IFC appealed these rulings.During the first quarter 2004, the United States District Court in Delawarereversed the Bankruptcy Court’s decision regarding the IFC, ruling that the IFCwas entitled to sovereign immunity.  TheCompany filed 

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an appeal to theU.S. Court of Appeals for the Third Circuit regarding this decision, and onFebruary 25, 2005, the Third Circuit overturned the District Court’s decision.The Court of Appeal denied IFC’s request for a rehearing.  The IFC then filed a motion with theBankruptcy Court to stay proceedings pending submission of the dispute toarbitration. The Bankruptcy Court granted this motion.  With regard to the Nova Hut appeal, theDistrict Court ruled that the Bankruptcy Court proceedings should also bestayed pending submission of dispute to arbitration. Nova Hut has now filed amotion to lift the stay and for summary judgment based upon a separatearbitration reported below. The Company does not oppose lifting the stay buthas filed an opposition to the motion for summary judgment and a cross-motion.The Company also has recently filed a motion with the Bankruptcy Court tosecure discovery against Nova Hut and the IFC, pending the initiation ofinternational arbitration proceedings by the Company as previously ordered bythe Bankruptcy Court.  The BankruptcyCourt has scheduled a hearing on this motion for April 25, 2007.

In January 2004,Kaiser Netherlands filed arbitration claims against Nova Hut in the amount of$51.1 million with the International Chamber of Commerce (“ICC”).  In November 2004, Kaiser Netherlands’ claimagainst Nova Hut was amended to include late interest and other chargestotaling $67.5 million.  Nova Hutsubmitted a $49.7 million counterclaim against Kaiser Netherlands in the sameproceedings.  The arbitration panel wasconstituted, and a hearing was held in September 2005.  On May 16, 2006, the Company was informedthat the ICC arbitration panel issued a non-appealable ruling that was notfavorable to the Company.  After calculationof claim and counter-claim award amounts, the net balance award against KaiserNetherlands, including legal cost and interest amounts, is approximately $4.1million in favor of Nova Hut (now Mittal Steel Ostrava).  The Company does not believe that Nova Huthas recourse against the Company to collect this net award amount.  The Company has learned, however, that NovaHut has filed an action to enforce the arbitration award against KaiserNetherlands in the Netherlands.

InDecember 2003, the ICC, under the dispute resolution provisions of the Nova Hutmini-mill subcontract between Kaiser Netherlands and the mini-mill’s mainequipment supplier, Tippins, Inc., issued a final award that was on balancefavorable to Kaiser Netherlands.  As aresult of the ruling, Kaiser Netherlands was relieved of the obligation to payadditional retention to Tippins, Inc., and Kaiser Netherlands was awarded a netcash settlement of $2.6 million.  TheCompany has not recorded this award due to the uncertainties regarding collectibility.  However, the Company is currently pursuingcollection of this award.

Thecontinued litigation of these disputes has had and will continue to have anegative impact on the cash flow of the Company.

**KaiserAnalytical Management Services, Inc.**

KAMS accounted for all ofour gross revenue in 2006, all of which were earned in the first half of 2006.Under prevailing market conditions, we determined that there were insufficientbusiness prospects for KAMS to expect future revenue from this source.

KAMS was established inApril 2004 as a wholly-owned subsidiary to take over the operations of theAnalytical Services Division of Kaiser-Hill. KAMS provided analytical management services such as sample planning, samplemanagement, records management, performance assessment and data management inthe general areas of health and safety, geotechnical, environmental and wastemanagement, and deactivation and decommissioning.

On July 1, 2004,KAMS began providing its services as a subcontractor at the Department ofEnergy’s Rocky Flats closure site in Colorado. For the term of its contract, KAMS received a fixed management fee forthese services plus a small base fee and efficiency incentives built onlaboratory sample costs.  Over the courseof its now-completed operations, KAMS also provided its services to a number ofother clients, in addition to the DOE.

**RetireeBenefit Obligation**

Wealso have the obligation to pay certain medical, disability and life insurancebenefits to a fixed group of retirees for life. Such plans cover certain individuals who retired prior to 1993.  There are approximately 500 retirees anddependents currently covered by the plans, the average age of whom isapproximately 80.  The actuariallydetermined present value of this obligation as of December 31, 2006, based onthe existing commitments, interest rate assumptions and related medical anddeath benefit obligations, was $6.5 million. The final valuation of the company’s benefit obligation and themethod used to ensure funding has been established through a claim resolutionproceeding in the Bankruptcy Court.  See Note 12 to our consolidated financialstatements included elsewhere in this report for additional information.

**Other Retained Assets, Activities andObligations**

We own a captive insurance company that is not at thistime engaged in issuing new policies but is solely engaged in the process ofresolving existing claims.  Restrictionson the insurance company’s cash balances, maintained to support statutory 

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insurance reserves, will be released as reserverequirements decrease in the future and to the extent such cash balances arenot used in payment of resolved claims. In the fourth quarter of 2004, wereceived regulatory approval and finalized the formation documents of asponsored captive subsidiary, MS Builders Insurance Company, to enable ourwholly-owned captive insurance company to offer derivative captive insuranceservices to third party clients.  As ofMarch 20, 2007, no policies have been written by MS Builders InsuranceCompany.  Whether or not new policieswill be written in the future will be determined on a case-by-case basis,subject to prevailing market conditions.

Our Board of Directors (the “Board”)will continue to explore opportunities for us with respect to the activities wecurrently conduct and potential new business activities in which we may engagein the future.

**Insurance**

We have a risk management and insurance program in placethat provides a range of coverages tailored to the needs of the reorganizedcompany.  Insurance coverages includepolicies for fiduciary, crime, directors and officers’ liability, property,general liability, and workers’ compensation coverage.

We believe that the insurance coverages we maintain, includingself-insurance, protect against risks that are comparable to those of similarbusinesses of our scope and present operating profile and that related coverageamounts are economically reasonable. At this time, we expect to continue to beable to obtain insurance in amounts generally available to firms with a similarprofile.  Insurance costs are rising, andthere can be no assurance that the insurance coverage and levels maintained byus will continue to be reasonably available. An insured claim, or uninsured claim for that matter, arising out ofpre-reorganization or post-reorganization activities of Old Kaiser, ifsuccessful and of sufficient magnitude, could have a material adverse effect onour financial position.

**Government Regulation**

We may, from time to time, either individually or inconjunction with other government contractors operating in similar types ofbusinesses, be involved in U.S. government investigations for allegedviolations of procurement or other federal laws and regulations.  No charges presently are known to have beenfiled against us by these agencies.

**Employees**

Asof March 20, 2007, the Company had four full-time employees.

**Available Information**

The address of our website is http://www.kaisergroup.com.

**Item 1A.**                 Risk Factors

This Annual Report onForm 10-K contains, and our periodic filings with the Securities and ExchangeCommission (“SEC”) and written or oralstatements made by our officers and directors to press, potential investors,securities analysts and others, may contain, forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but ratherare predictions and generally can be identified by use of statements thatinclude phrases such as “believe,” “expect,” “anticipate,” “estimate,” “intend,”“plan,” “foresee” or other words or phrases of similar import.  Similarly, statements that describe or contain information related to matters such asour intent, belief, or expectation with respect to financial performance,claims resolution, cash availability, stock redemption plans, contract awardsand performance, potential acquisitions and joint ventures, and cost-cuttingmeasures are forward-looking statements. These forward-lookingstatements often reflect a number of assumptions and involve known and unknownrisks, uncertainties and other factors that could cause our actual results todiffer materially from those currently anticipated in these forward-lookingstatements.  In light of these risks anduncertainties, including those described below, the forward-looking eventsmight or might not occur.  We undertakeno obligation to publicly update any forward-looking statement, whether as aresult of new information, future events or otherwise.

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**We facesignificant contingencies, which may adversely impact our ability to fund ourcontinuing operations and to undertake new operations.**

*We do not have a significant businessplan beyond Kaiser-Hill, and we may undertake new activities with start-up andother risks.*

Our long-term future profitability will be dependent, to a significantdegree, on the extent to which we carry out activities other than throughKaiser-Hill, particularly since Kaiser-Hill has entered the closeout phase ofits contract with the DOE and we have received most of the funds we expect toreceive from our investment in Kaiser-Hill. Unless and until we further developplans for such operations, we are unable to determine either the amount of riskthat future operations will involve or whether we have the ability to realizelong-term profitability.  The businessopportunities we have begun to explore, such as completion of the process toenable MS Builders Insurance Company to offer derivative captive insuranceservices, are in the development stage, are dependent to some extent onexternal market factors, may take a long time to develop, and may never beprofitable or successful at all.  As ofJune 30, 2006, we closed down the operations of KAMS, which we had establishedin 2004, and we may have similar experiences with other business opportunitiesthat we undertake.  We currently have noactive operations and are exploring potential acquisition and other strategicopportunities.  However, we may not beable to identify attractive acquisition or strategic opportunities for ourcompany.  In addition, efforts we make todevelop business operations separate from Kaiser-Hill may involve start-upactivities with risks specific to activities of this type, or may involveactivities with which we are not familiar, any of which may adversely impactour financial condition, cash flow and operating results.  A decrease in our cash flows andoperating results could result in a decrease in the value of our common stock.

*We havehad to, and may continue to have to, draw down existing cash balances to fundcurrent operating cash needs.*

In light ofphysical completion of Kaiser-Hill’s contract with the DOE, until and unlessthe Company is successful in developing a new revenue base through newcommercial activities or undertakings, it is anticipated that the Company willneed to rely on existing cash balances to fund its continuing operations,including overhead costs.  For the yearended December 31, 2006, the Company generated $0.2 million in gross revenuesfrom its KAMS operations and $1.9 million in interest income while generatingoperating losses of $7.9 million, which were funded by cash on hand.  This draw down in cash balances could resultin a decrease in the value of Kaiser Common Stock.  Furthermore, if the Company does notestablish new operating activities, its existing cash balances could becomeinsufficient to satisfy its overhead costs. The Company has not identified an attractive potential acquisition orstrategic opportunity in the last year, and management cannot predict if andwhen such opportunity may arise.  In themeantime, the Company generated no revenues in the second half of 2006, afterclosing KAMS as of June 2006.  If theCompany does not begin to generate revenues again, it will continue to operateat a loss and will be required to fund all of its operating costs with cash onhand.

*If wereceive the necessary stockholder approval and decide to proceed with thereverse stock split following the 2007 annual stockholders meeting, we willderegister our common stock under the Exchange Act, which will reduce theamount of information about us that is publicly available and will furtherdecrease the liquidity of our common stock.*

If we receive thenecessary stockholder approval at our 2007 annual meeting to implement theproposed reverse stock split and decide to proceed with the reverse stocksplit, we will attempt to terminate the registration of our common stock underthe Exchange Act.  If we were to deregister our common stock under theExchange Act, we would no longer be required to file information with the SECor provide certain information to our stockholders under the Exchange Act, andmany provisions of the Exchange Act would become inapplicable to us. Therefore, deregistration will substantially reduce the information we would berequired to furnish to our stockholders. If successful, the reverse stock splitwill result in use of cash to redeem any fractional shares resulting from thereverse stock split.

Furthermore, our commonstock is currently traded on the Pink Sheets. Broker-dealers oftendecline to trade in Pink Sheet stocks given that the market for such securitiesis often limited, the stocks are more volatile, and the risks to investors aregreater. These factors may reduce the potential market for our common stock byreducing the number of potential investors, and if we deregister our commonstock, the number of potential investors may be reduced further.  Themarket for our common stock has been relatively illiquid in the past, andderegistration may make it even more difficult for investors in our commonstock to sell shares to third parties or to otherwise dispose of them. Thiscould cause our stock price to decline. Additionally, there can be no assurancethat our stock will continue to trade on the Pink Sheets.

*We may be unsuccessful inimplementing and funding an acceptable benefits funding plan to satisfy ourobligation to provide future benefits to a fixed group of retirees.*

The Companyremains obligated to continue to fulfill the provisions of Old Kaiser’spreviously curtailed benefits plan, which provides certain medical and deathbenefits to a group of retirees.  All ofthe benefits derived from the plan are fully covered by the Company’sself-insurance.

Since the December 2000approval of the reorganization plan, the Company has been negotiating withthe  Official Committee of Retirees (“OCR”)appointed by the Bankruptcy Court to design and implement a benefits fundingplan that would provide for all retiree benefit obligations going forward.   In an adversary claim hearing in theBankruptcy Court held on April 12, 2006, the Bankruptcy Court accepted theCompany’s proposal to establish a Voluntary Employees’ Beneficiary Association

6

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(“VEBA”) to fund retirees’future medical and death benefits in the present value amount of approximately$6.1 million.  The present value pensionobligation of $0.3 million will continue to be funded directly by the Company.

Furthermore, according tothe terms of the Bankruptcy Court decision, after the VEBA has been in placefor five years, the Company will be required to undertake an actuarial analysisof the projected net present value of benefits remaining to be paid out.  If the remaining VEBA fund amount is then notsufficient to pay the estimated present value benefits obligation, then theCompany will be required to contribute the estimated shortfall amount to theVEBA fund.  It is not possible to predictat this time whether a shortfall in the VEBA fund would exist after a period offive years and, if so, what the Company’s contribution requirement for ashortfall amount would be in this circumstance. A requirement to fund asignificant shortfall in the VEBA fund could result in a decrease in the valueof Kaiser Common Stock.

*We may beunable to obtain performance guarantees, which may limit our ability toundertake new activities.*

Given the reorganization history of Old Kaiser,we may not be able to obtain satisfactory contract performance guarantymechanisms, such as performance bonds and letters of credit, on satisfactoryterms or at all, to the extent such mechanisms are needed for new activitiesand projects.  These factors could limitthe nature of the business activities in which we can engage, which mayadversely impact our cash flow and operating results and result in adecrease in the value of our common stock.

*We may be unable to generate funds tomeet our cash flow needs, and we may be unable to access additional capital.*

We may be unable to continue to generate sufficient funds to meet ourcash flow needs.  In the event our cashneeds exceed our current estimates, we may not be able to obtain additionalcapital to meet those needs on favorable terms, or at all.  In particular, due to the reorganizationhistory of Old Kaiser and current financial markets, additional capital may notbe available to us.  An inability to gainaccess to additional capital could also limit our ability to undertake newactivities.  Ultimately, an inability tomeet our existing obligations or to undertake new activities could adverselyimpact our cash flow and operating results. A decrease in our cash flows and operating results could resultin a decrease in the value of our common stock.

**Ourremaining primary source of funding has been and continues to be distributionsfrom Kaiser-Hill, which is subject to uncertainties that may adversely impactthe potential value of our common stock.**

*There arerisks associated with the resolution of additional financial and administrativecontract closeout issues that may affect the timing and award of future cashdistributions  from Kaiser-Hill to theCompany.*

On October 13,2005, Kaiser-Hill declared physical completion of the cleanup and closure ofthe DOE’s Rocky Flats site.  Kaiser-Hillhas withheld approximately $3.6 million from the DOE final distribution**,** pending resolution of certain financial and administrativecontract closeout issues, including those associated with the Kaiser-Hill costreconciliation process.  It is possiblethat there will be disputes between the DOE and Kaiser-Hill as to how theseissues should be addressed and dealt with. Such disputes could delay or reduce future distributions of cash fromKaiser-Hill to the Company and could cause a decrease in the value of ourcommon stock.

*There are potential risks associated with U.S.Government audits of Kaiser-Hill which could result in disallowed costs or costreclassifications requiring refunds of cash from Kaiser-Hill to the DOE.*

As the contract between Kaiser-Hill and the DOE contains costreimbursement provisions, the costs invoiced by Kaiser-Hill for reimbursementby the DOE are subject to audit by the U.S. Government.  Government audits of costs invoiced byKaiser-Hill are ongoing and are expected to take many years to complete.  Although Kaiser-Hill has historicallyprovided its estimates of disallowed costs, uncertainties exist with regard tothe government audit of Kaiser-Hill.  Tothe extent that costs are disallowed and cash refunds are made to the DOE,future cash distributions from Kaiser-Hill to the Company would be reduced andcould cause a decrease in the value of our common stock.

**Item 1B.**                 Unresolved StaffComments

Not applicable.

 

7

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**Item 2.**                          Properties

We owned no properties as of December 31, 2006.  We leased two properties as of December 31,2006: our headquarters located at 9300 Lee Highway, Fairfax, Virginia22031-1207; and a facility used by KAMS, located at 12303 Airport Way, Broomfield,Colorado, 80021-0007. We have subleased the KAMS facility in Colorado.

**Item 3.**                          LegalProceedings

On June 9, 2000, Old Kaiser and 38 of its wholly-ownedsubsidiaries filed petitions for relief under Chapter 11 of the U.S. BankruptcyCode with the Bankruptcy Court in order to facilitate the restructuring of OldKaiser’s long-term debt, trade and other obligations. Old Kaiser continued tooperate as a debtor-in-possession subject to the Bankruptcy Court’s supervisionand orders until its Plan of Reorganization was confirmed on December 5, 2000and became effective on December 18, 2000. The provisions of such plan arefurther described in “General Terms and Distributions Status of Plan ofReorganization” under Item 1 of this Report, in Note 2 to the consolidatedfinancial statements appearing elsewhere in this report, and in a CurrentReport on Form 8-K filed with the SEC on December 14, 2000 by Old Kaiser.

In the course of normalbusiness activities, various claims or charges have been asserted and litigationcommenced against Old Kaiser arising from or related to properties, injuries topersons and breaches of contract, as well as claims related to acquisitions anddispositions. Such claims are now part of the overall bankruptcy proceeding.Claimed amounts may not bear any reasonable relationship to the merits of theclaim or to a final court award. In the opinion of management, an adequatereserve has been provided for final judgments, if any, in excess of insurancecoverage, that might be rendered against Old Kaiser in the event ofunsuccessful bankruptcy resolution. The continued adequacy of reserves isreviewed periodically as such matters progress.

The Company has specificclaims, pending resolution, in the Bankruptcy Court against the owner of a steelmini-mill that Kaiser Netherlands constructed for Nova Hut in the CzechRepublic and against the IFC, which provided financing for the mini-millproject. For further discussion of this litigation, see “Nova Hut” in Item 1 ofPart 1 of this report.

**Item 4.**                          Submissionof Matters to a Vote of Security Holders

No matter was submitted to avote to security holders during the fourth quarter of 2006.

**PART II**

**Item 5.**                          Market for Registrant’s Common Equity and Related Stockholder Matters

**MarketInformation**

Effectivewith implementation of Old Kaiser’s Plan of Reorganization, on or about April17, 2001 each 96 shares of Old Common was exchanged for 1 share of KaiserCommon Stock.  Kaiser Common Stock isquoted on the Pink Sheets Electronic Quotation Service (“Pink Sheets”) underthe symbol “KGHI”.  At March 20, 2007, there were 503 shareholders ofrecord of Kaiser Common Stock.

The following table sets forth the high and low saleprices for the Kaiser Common Stock as reported on the Pink Sheets for periodsindicated below.

| Year Ended December 31, | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| ** **                             | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|                                   |       |     |       |     |       |   |   |   |   |
| First Quarter                          |       | $        | 42.00      |     | $          | 36.50 |   | $ | 29.00 |   | $ | 23.50 |   |
| Second Quarter                         |       | 40.50    |       | 29.00    |       | 37.00 |   | 27.50 |   |
| Third Quarter                          |       | 34.10    |       | 29.50    |       | 44.00 |   | 28.80 |   |
| Fourth Quarter                         |       | 31.50    |       | 24.99    |       | 43.25 |   | 36.00 |   |
|                                        |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

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**Stock Price Performance Graph**

The following graph plots cumulative total return on a $100 investmentmade on December 31, 2001 in the Common Stock. The S&P 500 Index and group of peer issuers are shown for comparisonand include reinvestment of dividends where applicable.  The peer issuers were selected because of thesimilarity of business elements and contracts held with the DOE.  These peer issuers include the following fivecompanies:  Fluor Corporation,Jacobs Engineering Group, Inc., The Shaw Group, Inc., TRC Companies, Inc. andWashington Group International, Inc. The stock performance indicated on thegraph is not a guarantee of future performance.

 
| ** **                                     | ** ** | **Cumulative Total Return** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2001**                              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Kaiser Group  Holdings, Inc.                   |       | $                                     | 100.00     |   | $ | 169.36 |   | $ | 693.55 |   | $ | 854.85 |   | $ | 1258.07 |   | $ | 806.17 |   |
| S&P 500                                    |       | $                                     | 100.00     |   | $ | 77.89 |   | $ | 100.23 |   | $ | 111.13 |   | $ | 114.47 |   | $ | 132.54 |   |
| Peer Issuers  Only                             |       | $                                     | 100.00     |   | $ | 97.80 |   | $ | 80.23 |   | $ | 112.42 |   | $ | 135.48 |   | $ | 151.71 |   |
| Peer Issuers plus  Kaiser Group Holdings, Inc. |       | $                                     | 100.00     |   | $ | 97.81 |   | $ | 80.30 |   | $ | 112.86 |   | $ | 136.02 |   | $ | 161.85 |   |

 

Our Transfer Agent and Registrar is Computershare TrustCompany, N.A., P.O. Box 43023, Providence, RI 02940-3023.  The Shareholder Relations telephone number is(781) 575-2726, the hearing impaired number for callers inside the UnitedStates is (800) 952-9245, and for hearing impaired callers outside the UnitedStates, the telephone number is (781) 575-2726. The internet address for our Transfer Agent and Registrar ishttp://www.equiserve.com.

We did not pay a cash dividend on Kaiser CommonStock prior to December 31, 2006.  OnDecember 21, 2006, we declared a cash dividend of $6.00 per share tostockholders of record on January 2, 2007. The dividend was paid on January 16, 2007. Any future determination topay cash dividends will be at the discretion of our Board which determines ourdividend policy based on our results of operations, capital requirements, andother factors that our Board deems relevant.

**Recent Sales ofUnregistered Securities**

During 2006, the Companydid not sell any equity securities that were not registered under theSecurities Act of 1933.

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**Item 6.**                          Selected ConsolidatedFinancial Data

Selected consolidated financial data of Kaiser GroupHoldings, Inc. for the years ended December 31, 2006, 2005, 2004, 2003 and 2002have been derived from our audited consolidated financial statements. Thisinformation should be read in conjunction with consolidated financialstatements and the related notes thereto appearing elsewhere in this Report and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations”. Certain reclassifications have been made to the prior periodfinancial statements to conform to the presentation used in the December 31,2006 consolidated financial statements appearing elsewhere in this report.

**Selected Consolidated Financial Data(in thousands, except per share data)**
| ** **                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Statement of Operations Data:                                |       |     |       |     |       |     |       |     |       |     |       |
| Gross revenue                                                |       | $        | 222        |     | $          | 1,807    |       | $        | 1,036      |     | $          | — |   | $ | — |   |
| Service (loss) income                                        |       | (282     | )          | 630      |       | 288      |       | —   |       | —   |       |
| Operating loss                                               |       | (7,880   | )          | (11,263  | )          | (6,364   | )          | (4,918   | )          | (7,028   | )          |
| (Loss) Income from continuing operations before income taxes |       | (5,998   | )          | 77,457   |       | 9,110    |       | 11,028   |       | 29,165   |       |
| Net (loss) income                                            |       | (2,368   | )          | 45,292   |       | 7,375    |       | 4,368    |       | 18,343   |       |
|                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Basic and Diluted (Loss) Earnings Per Share:                 |       |     |       |     |       |     |       |     |       |     |       |
| Continuing operations                                        |       | $        | (1.32      | )        | $          | 27.86    |       | $        | 4.58       |     | $          | 2.91 |   | $ | 8.54 |   |
| Discontinued operations, net of tax                          |       | —   |       | —   |       | —   |       | (1.14    | )          | 0.31     |       |
|                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Net (loss) earnings per share                                |       | $        | (1.32      | )        | $          | 27.86    |       | $        | 4.58       |     | $          | 1.77 |   | $ | 8.85 |   |
|                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Weighted average common shares outstanding:                  |       |     |       |     |       |     |       |     |       |     |       |
| —basic                                                  |       | 1,790    |       | 1,626    |       | 1,610    |       | 1,606    |       | 1,602    |       |
| —diluted                                                |       | 1,790    |       | 1,626    |       | 1,610    |       | 1,606    |       | 1,602    |       |
|                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Cash Dividends declared per common share                     |       | $        | 6.00       |     | $          | —   |       | $        | —     |     | $          | — |   | $ | — |   |
|                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Balance Sheet Data (end of period):                          |       |     |       |     |       |     |       |     |       |     |       |
| Total assets                                                 |       | $        | 86,499     |     | $          | 122,024  |       | $        | 72,714     |     | $          | 74,080 |   | $ | 96,195 |   |
| Long-term liabilities*                                       |       | —   |       | —   |       | 26,909   |       | 35,175   |       | —   |       |
| Mandatorily Redeemable preferred stock *                     |       | —   |       | —   |       | —   |       | —   |       | 55,942   |       |
| Shareholders’ equity                                    |       | 66,117   |       | 79,111   |       | 27,545   |       | 20,077   |       | 17,805   |       |
|                                                         |       |     |       |     |       |     |       |     |       |     |       |

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*After the adoption of SFAS No. 150 on July 1, 2003, we reclassified mandatorilyredeemable preferred stock from mezzanine equity to long term liabilities.  At December 31, 2004 and 2003, long termliabilities consist entirely of mandatorily redeemable preferred stock.

**Item 7.**                          Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

***Overview***

Since the Plan of Reorganization of Old Kaiser underChapter 11 of the Bankruptcy Code became effective on December 18, 2000, wehave completed the initial bankruptcy distributions to allowed claimholders,continued to progress in resolving remaining outstanding bankruptcy claims,managed our remaining assets, wound down unnecessary elements of previousactivities and corporate structure, redeemed all of the New Preferred sharesoutstanding and formed two new business opportunities, KAMS and MS BuildersInsurance Company. We do not expect future revenues from our KAMS subsidiary.

Following the effectiveness of the Plan ofReorganization, we now have only a limited number of activities, assets andliabilities, primarily consisting of the following:

·                  Weown Kaiser-Hill equally with CH2M Hill. Kaiser-Hill has been our major source of income.  Kaiser-Hill served as the general contractorat the DOE’s Rocky Flats site. Kaiser-Hill has performed for the Department ofEnergy at this site since 1995 and in January 2000 was awarded a new contractto manage the closure of the site.  Thelevel of success experienced by Kaiser-Hill in achieving timely closure of theRocky Flats site, and the cost of achieving such closure, have been andcontinue to be the primary determinants of our long-term financial performancefollowing the completion of the bankruptcy reorganization process.

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·                  OnMay 16, 2006, we were informed that an arbitration panel formed under theauspices of the ICC issued a ruling in the arbitration proceeding initiated byour subsidiary, Kaiser Netherlands, concerning the steel mini-mill that wasconstructed by Kaiser Netherlands for Nova Hut, a.s. (now Mittal Steel Ostrava,a.s.) in Ostrava, the Czech Republic. After calculation of the amounts awarded on the claim and counterclaim,the net balance award against Kaiser Netherlands, including legal cost andinterest amounts, is approximately $4.1 million in favor of Nova Hut.  We do not believe that Nova Hut has recourseagainst us to collect this amount.  Weare currently evaluating our remaining options against Nova Hut and theIFC.  Taking into account the results ofthe ICC arbitration ruling against Kaiser Netherlands, in the second quarter of2006 we wrote off the remaining Nova Hut contract receivable of $3.0 million byrecording an additional reserve of $3.0 million.

·                  We own a captive insurance company that has notbeen issuing new policies since October 1, 2000 and has solely been involved inresolving remaining claims made against previously issued policies.  In the fourth quarter of 2004, we receivedregulatory approval and finalized the formation documents of a sponsoredcaptive subsidiary, MS Builders Insurance Company, to enable our wholly-ownedcaptive insurance company to offer derivative captive insurance services tothird party clients.  As of March 20,2007, MS Builders Insurance Company has not written any policies.

·                  We have an ongoing obligation to fund a cappedpost-employment medical benefit plan for a fixed group of retirees.  Once the former employee VEBA is established,we have a one-time obligation to fund any shortfall, as described in Note 12 tothe consolidated financial statements included in Item 8 of Part II of thisreport.

***Outlook***

*Potential**Kaiser-Hill Distribution*.  As we look forward, a significant factor indetermining the value of our Common Stock is the closeout performance ofKaiser-Hill and the completion of the U.S. Government’s related project audits.

On October 13, 2005, Kaiser-Hill declared physical completion of theclean up and closure of the DOE’s Rocky Flats site.  On December 8, 2005, the DOE accepted thephysical completion in accordance with the contract.  The projected total fee to be earned pursuantto the contract is estimated to be $510.9 million based on Kaiser-Hill’s costto complete the site closure of $3.44 billion. As of March 20, 2007, Kaiser-Hill had received $510.8 million of suchfee from the DOE.

On December 8,2005, when the DOE accepted physical completion in accordance with the RockyFlats Closure Contract, it authorized Kaiser-Hill to invoice all remainingperformance fees less a retained amount equaling $5.0 million which wasretained by the DOE for possible contract contingencies.  On January 11, 2006, Kaiser-Hill receivedpayment for all fees except for the retained amount.  As a result of this payment, on March 1,2006, the Company received an $80.0 million cash distribution (representing its50% share) from Kaiser-Hill.  As of March31, 2006, Kaiser-Hill had received $505.9 million of the $510.9 million duefrom the DOE. On April 14, 2006, $4.9 million of the remaining $5.0 million wasreleased to Kaiser-Hill by the DOE.  Itcannot be determined at this time what amount, if any, of the remaining $0.1million DOE retention balance will ultimately be released and when, if ever,such a release will occur.  On June 30,2006, the Company received an additional $5.0 million cash distribution fromKaiser-Hill (representing its 50% share). On February 27, 2007, the Company received another $1.5 million cashdistribution from Kaiser-Hill (representing its 50% share).

Kaiser-Hill now operates under the closeout phase of itscontract with the DOE, primarily resolving open administrative issues andproviding support to the DOE to achieve regulatory closure of the site.  The closeout phase of the contract is a costreimbursable phase and is not fee-bearing; the Company does not expect that thecloseout phase will impact fees earned.

Kaiser-Hillis continuing its internal review and reconciliation of contract financial andadministrative closeout issues.  As ofMarch 20, 2007, Kaiser-Hill has withheld approximately $3.6 million fromdistribution until these closeout issues are clarified further.  We expect to receive our 50% share of anydistribution of such funds by Kaiser-Hill.

Weexpect that we will be required to fund 50% of a reserve to be established byKaiser-Hill relating to potential future payments resulting from U.S.Government audits.  At this time, it isnot possible to predict the number of years that will be required to completethe government audit process.

*Nova Hut.*  Weare currently evaluating our remaining options against Nova Hut and theIFC.  Among the options being consideredis filing independent arbitration claims by Kaiser Holdings (as opposed toKaiser Netherlands) against Nova Hut and the IFC in accordance with priorrulings of the Bankruptcy Court.  TheBankruptcy Court has

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entered an order stayingour bankruptcy claim against the IFC pending submission of the dispute forarbitration.  Similarly, the BankruptcyCourt has entered an order staying our bankruptcy claim against Nova Hut,pending submission of the dispute to arbitration.  We have a motion pending with the BankruptcyCourt seeking discovery against Nova Hut and the IFC.  This motion has been stayed pending a hearingon April 25, 2007.

The continuedlitigation of these disputes has had, and will continue to have, a negativeimpact on our cash flow.

Taking intoaccount the results of the ICC arbitration ruling against Kaiser Netherlands,in the second quarter of 2006 we wrote off the remaining Nova Hut contractreceivable of $3.0 million by recording an additional reserve of $3.0 million.

*Proposed Reverse Split*.**Our KaiserCommon Stock is currently registered under the Securities Exchange Act of 1934(the “Exchange Act”), and consequently we are subject to reporting obligationsof the Exchange Act.  In special meetingson March 31, 2005, and June 20, 2005, our Board unanimously approved a 1-for-20reverse split of the Kaiser Common Stock. Implementation of the 1-for-20reverse split was held in abeyance pending the resolution of an outstandingclaim in bankruptcy court involving the former stockholders of ICT SpectrumConstructors, Inc., (“ICT Spectrum”), a corporation acquired by a merger with asubsidiary of Kaiser International’s predecessor in 1998.  On October 19, 2005, the Company entered intoa settlement agreement with the representatives of the former stockholders ofICT Spectrum and on December 6, 2005, the Bankruptcy Court approved theproposed settlement agreement.

The Board discussed the reversesplit on March 21, 2006, April 21, 2006, July 19, 2006 and October 24,2006.  At each of the meetings in March,April and July 2006, the Board considered the reverse split and decided totable further action.  On October 24,2006, the Board reconsidered the reverse split and unanimously voted to havethe Company prepare a recommendation for accomplishing a reverse split.  At a meeting on January 31, 2007, managementorally presented an implementation plan to the Board.  The Board voted in favor of seekingstockholder approval for the reverse split of the Company’s Common Stock intime for the Annual Meeting of Stockholders on May 30, 2007.

Proceeding with a1-for-20 reverse split requires that we amend the Company’s Certificate ofIncorporation, which requires stockholder approval.  The Board adopted resolutions at a specialmeeting held on March 19, 2007, which, among other things, set forth theproposed amendment, determined that the reverse split is advisable, and calledfor submission of the amendment for approval by the Company’s stockholders atthe Annual Meeting to be held on May 30, 2007.

If a proposal to amendthe Company’s Certificate of Incorporation is included in the agenda of theAnnual Meeting of Stockholders, to be held on May 30, 2007, details about thereverse split will be included in the proxy materials delivered to ourstockholders in connection with such meeting. It is anticipated that such a reverse split would reduce the number ofrecord holders of Kaiser Common Stock to below 300, which would allow us toterminate our reporting obligations under the Exchange Act and continueoperations as a non-reporting company. In that event, we would file a Form 15 with the SEC.  Upon filing of the Form 15, our reportingobligations under the Exchange Act would be suspended , meaning that we wouldno longer be required to file with the SEC certain reports and forms, includingForms 10-K, 10-Q and 8-K and proxy statements. In such event, thereafter, the Company would provide information aboutits quarterly and annual financial results to its remaining stockholders byother means, such as through its website.

***Critical AccountingPolicies and Significant Estimates***

**Thepreparation of financial statements in conformity with GAAP requires that wemake estimates and assumptions affecting the assets and liabilities (includingcontingent assets and liabilities) reported at the date of the ConsolidatedFinancial Statements and the income statement amounts reported for the periodspresented.  We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.**

Our accountingmeasurements that are most affected by our estimates of future events are:

·                  Recoverabilityof accounts receivable and investments;

·                  Incometax provision, deferred tax assets and liabilities;

·                  Use of the equity method of accounting forKaiser-Hill, an affiliate that we have the ability to significantly influencebut not control.  In accordance with theequity method of accounting, we record our proportionate share of the affiliate’sincome or losses;

·                  Estimatedfees on the Kaiser-Hill joint venture. Estimating future costs, contractcontingencies and revenues and profits, is a process requiring a high degree ofjudgment.  In the event of a change intotal estimated contract cost or profit, the cumulative effect of such changeis recorded in the period the change in estimate occurs.  Now that

12

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                        thecontract has been declared complete, additional revenue recognition and ourprofitability from the Kaiser-Hill contract may be adversely affected to theextent that estimated cost to complete or incentive or award fee estimates arerevised upon audit from the U. S. Government. The Kaiser-Hill contract containsincentive provisions for increased or decreased revenue and profit based onactual performance against established cost targets and schedule-relatedgoals.  Incentive fees have been includedin estimated contract revenue at the time the amounts can be reasonablydetermined and are reasonably assured based on historical experience and otherobjective criteria.  Should total costsof the project be revised based upon the results of U. S. Government audits,previously recognized revenues could be reversed and/or future period revenuescould be reduced; and

·                  Ourliability in connection with a post-employment medical benefit plan for a fixedgroup of retirees.  This liability isaffected by changes in the discount rate and certain actuarialassumptions.  Should actual rates andresults differ from the assumptions used, revisions to the liability would berequired resulting in additional income statement charges.

***New Accounting Standards***

InMay 2005, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and ErrorCorrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”).  SFAS No. 154 addressesthe requirements for the accounting for, and reporting of, a change inaccounting principle.  This statement requires retrospective applicationto prior periods’ financial statements of changes in accounting principle,unless it is impractical to determine period-specific effects or the cumulativeeffect of the change.  We adopted SFAS No. 154 effective January 1, 2006.The adoption of SFAS No. 154 did not have a material impact on our consolidatedfinancial statements.

InJuly 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an Interpretation of FASB Statement No.109” (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income tax positions and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return, and providesguidance on derecognition, interest and penalties, accounting in the interimperiods and transition.  The provisionsof FIN 48 are effective for fiscal years beginning after December 15,2006.  The Company is currently assessingthe impact, if any, of the interpretation on its financial position or resultsof operations.

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). ThisStatement defines fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We arecurrently assessing the impact, if any, of SFAS No. 157 on our consolidatedfinancial statements.

In September 2006, theFASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pensionand Other Postretirement Plans (an amendment of FASB Statements No. 87, 88,106, and 123R)” (“SFAS No. 158”). The objectives of this Statement are for anemployer to: (1) recognize the overfunded or underfunded status of asingle-employer defined benefit postretirement plan as an asset or liability inits statement of financial position and to recognize changes in funded statusin comprehensive income in the year in which the changes occur; and (2) measurethe plan status as of the date of its year-end statement of financial position.SFAS No. 158 is effective for the requirement to recognize the funded status ofa benefit plan and the disclosure requirements as of the end of the fiscal yearending after December 15, 2006. The requirement to measure plan assets andbenefit obligations as of the date of the employer’s fiscal year-end statementof financial position shall be effective for fiscal years ending after December15, 2008. The adoption of SFAS No. 158 did not have a material impact on ourconsolidated financial statements.

In September 2006, theSEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”), to address diversity in practice in quantifyingfinancial statement misstatements. SAB 108 requires quantification of financialstatement misstatements based on the effects of the misstatements on each ofthe company’s financial statements and the related financial statementdisclosures. SAB 108 did not have a material impact on our consolidatedfinancial statements.

13

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**Results of Operations**

*Years Ended December 31, 2006, 2005, and 2004*

*Gross Revenues*

The Company’s gross revenues for2006 are directly attributable to the operations of KAMS.  Gross revenues of KAMS were $0.2 million for2006.  For the comparable periods of 2005and 2004, gross revenues were $1.8 million and $1.0 million, respectively.  Gross revenues of KAMS decreased in 2006 dueto the wind-down and completion of work at the DOE’s Rocky Flats site. Futurerevenue is not expected from our KAMS subsidiary.  Gross revenues increased in 2005 relative to2004 because 2004 was KAMS’s first year of operation and, KAMS was in operationfor only a portion of the year.  Grossrevenues in 2006, 2005, and 2004 from KAMS operations resulted primarily fromthe performance of laboratory audits and data validation services.

*Equity Income (Loss) In Earnings of Joint Venture*

Our major remaining source of income is a 50% ownership inKaiser-Hill.  We own Kaiser-Hill equallywith CH2M Hill.  The financialinformation contained herein for Kaiser-Hill is reflected on the equitybasis.  Because Kaiser-Hill represents asignificant portion of our financial position and results of operations, theaudited financial statements of Kaiser-Hill are included in this report (seepages F-21 to F-30).

*Contract Provisions for Revenue andPerformance Award*

Kaiser-Hill’s contract with the DOE provides that Kaiser-Hill earnrevenue equal to the actual cost of physical completion plus a performancefee.  The performance fee is determinedbased on (1) Kaiser-Hill’s cost to complete the site closure, which must bewithin the range of $3.1 billion and $4.9 billion, (2) the schedule of physicalcompletion, which must be before 2007 and (3) Kaiser-Hill’s safetyperformance.  On October 13, 2005,Kaiser-Hill declared physical completion of the cleanup and closure of the DOE’sRocky Flats site.  At the time ofdeclaration of physical completion on October 13, 2005, Kaiser-Hill’s costestimate to complete the project remained at $3.44 billion, which resulted in aperformance fee payable to Kaiser-Hill projected to be $510.9 million,of which $255.0 million had previously been received.  On December 8, 2005, the DOE affirmedKaiser-Hill’s declaration as required under the contract and the DOE authorizedKaiser-Hill to invoice all remaining performance fees less a retained amountequaling $5.0 million.  On January 11,2006, Kaiser-Hill received payment for all remaining fees except the retainedamount.  As a result of this payment, onMarch 1, 2006, the Company received an $80.0 million cash distribution(representing its 50% share) from Kaiser-Hill. On April 14, 2006, $4.9 million of the remaining $5.0 million retentionwas released to Kaiser-Hill by DOE.  Itcannot be determined at this time what portion of the remaining $0.1 millionDOE retention balance will ultimately be released and when (if ever) such arelease would occur.  On June 30, 2006,the Company received an additional $5.0 million cash distribution from Kaiser-Hill.  On February 27, 2007, the Company receivedanother $1.5 million cash distribution from Kaiser-Hill.  As of March 20, 2007, Kaiser-Hill hadreceived $510.8 million of the $510.9 million fee due from the DOE pendingcompletion of the closeout phase of the contract.

Since Kaiser-Hilldeclared physical completion, many of the performance risks have beeneliminated, but contract risks and uncertainties remain.  As a result ofdeclaration of physical completion in October 2005, Kaiser-Hill recognized allremaining performance fees under the contract in 2005 and has establishedreserves for certain risks and uncertainties related to the contract (seedetails described below in “— Closure Contract Billing Provisions”).  Kaiser-Hill will reverse these reserves tothe extent it is successful in mitigating or eliminating these remainingcontract risks and uncertainties.

For the year ended December 31, 2006, we recorded a nominal loss fromour 50% equity investment in Kaiser-Hill. For the years ended December 31, 2005and 2004, we recorded our 50% equity in Kaiser-Hill’s income of $95.7 million,and $20.3 million, respectively, reduced by $7.0 million and $3.5 million,respectively for the amortization of the excess of our carrying value of ourinvestment in Kaiser-Hill over our ownership percentage of the underlyingKaiser-Hill equity.  The differences inthe Kaiser-Hill earnings between 2006 and 2005 were due to the declaration ofphysical completion on October 13, 2005 and the affirmation by the DOE of completionof the project on December 8, 2005 which resulted in Kaiser-Hill recognizingall remaining performance fees under the contract less certain establishedreserves in 2005. The differences in the Kaiser-Hill earnings between 2005 and2004 were due to the declaration of physical completion in October 2005 and theaffirmation by the DOE of completion of the project in December 2005 whichresulted in Kaiser-Hill recognizing all remaining performance fees under thecontract less certain established reserves in 2005.  Kaiser-Hill’s estimate of the final grossperformance fee to be earned upon completion of the contract increased from$388.0 million to $429.0 million as of December 31, 2003 and 2004,respectively, and then with the declaration of physical completion, increasedto $510.9 million as of December 31, 2005.

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*Closure Contract Billing Provisions*

****From the inception of Kaiser-Hill’scontract with the DOE in February 2000 through December 31, 2006, Kaiser-Hillinvoiced the DOE for the performance fee based on the contract provisions ofapproximately $510.9 million, and collected an aggregate of $510.8 million infees from the DOE****. It is not known when, if ever, the remaining DOE retention balance of$0.1 million will be released to Kaiser-Hill. By contract, this remaining retention balance amount cannot be releaseduntil final contract closeout.

Fee payments madeby the DOE to Kaiser-Hill, less certain non-reimbursable costs and reserve andretention amounts, have been distributed to the joint venture owners uponreceipt.  Kaiser-Hill has historicallyincurred expenses that are not reimbursable by DOE pursuant to applicableFederal regulations.  Accordingly, suchexpenses, which Kaiser-Hill estimates could total approximately 15% to 20% ofthe total award fee, are deducted from the total fee earned and collected byKaiser-Hill prior to any distributions to either of its two owners.  From Kaiser-Hill’s inception through March20, 2007, Kaiser-Hill had distributed $194.2 million in cash to each of its twoowners.

Kaiser-Hill is continuing its internal review and reconciliation ofcontract financial and administrative closeout issues.  As of March 20, 2007, Kaiser-Hill haswithheld approximately $3.6 million from distribution until these closeoutissues are resolved.  As discussed above,Kaiser-Hill also may receive an additional $0.1 million that has been retainedby DOE.  The Company expects to receiveits 50% share of any future distributions of such funds by Kaiser-Hill.

Kaiser-Hill recognized asubstantial amount of the fee income from the DOE upon the declaration ofphysical completion on October 13, 2005 and, accordingly, the Company’sproportionate share of such income was recorded in Equity Income in Earnings ofAffiliate in its consolidated statement of operations for the year endedDecember 31, 2005.  The Company receiveddistributions in the aggregate amount of****$85.0 millionfrom Kaiser-Hill during 2006.  As aresult, the Company had reduced its investment in Kaiser-Hill on its balancesheet by $85.0 million as of December 31, 2006.

Kaiser-Hill now operates under the closeout phase of its contract withthe DOE, primarily resolving open administrative issues and providing supportto the DOE to achieve regulatory closure of the site.  The closeout phase of the contract is a cost- reimbursable phase and is not fee - bearing; the Company does not expect thatthe closeout phase will impact fees earned. Effective December 31, 2005, Kaiser-Hill terminated its remainingemployees. Staff necessary to complete closeout activities is subcontracted or providedby CH2M Hill.

We reported anominal loss from our 50% ownership in Kaiser-Hill in 2006 because during 2005Kaiser-Hill recorded all of the contract fee income, less applicable reserves,due from the DOE. In the future, we may have additional income from Kaiser-Hillto report to the extent Kaiser-Hill determines that certain recorded reserves,as mentioned above, are no longer necessary. For the years ended December 31,2005 and 2004, we reported income of****$95.7 millionand $20.3 million**,** respectively from our 50%ownership of Kaiser-Hill.****For the yearsended December 31, 2005 and 2004, our equity income in earnings of affiliatewas net of $7.0 million and $3.5 million, respectively of amortization of theexcess of our carrying value of our investment in Kaiser-Hill over ourownership percentage of the underlying Kaiser-Hill equity.****Aspart of our adoption of fresh-start reporting as of December 31, 2000, weincreased the carrying value of our investment in Kaiser-Hill by $21.1 million,and we were amortizing that difference over an estimated life of theKaiser-Hill investment of approximately 6 years. Upon Kaiser-Hill’s declarationof physical completion on October 13, 2005, we wrote off at September 30, 2005,the then remaining $5.3 million unamortized balance.

*Administrative Expenses*

Administrative expenses for the years ended December 31, 2006, 2005 and2004 consisted largely of salaries, legal and professional fees incurred foractivities associated with the bankruptcy proceedings or with winding down ofhistorical operations, as well as the cost to fund a certain retiree benefitcommitment.  Administrative expenses forthe year ended December 31, 2006 compared to December 31, 2005 decreased 22.3%or $1.3 million primarily due to the decrease in salaries and professional feesrelated to Nova Hut and ICT Spectrum litigation.  Administrative expenses for the year endedDecember 31, 2005 compared to December 31, 2004 increased 12.8% or $0.7 milliondue primarily to the increase in legal fees related to the Nova Hut arbitrationand the ICT Spectrum litigation (discussed in more detail below under “Reservefor Settlement with ICT Spectrum”).

Our cost to provide certain on-going post-retirement medical****benefits to a fixed number of retirees isalso treated as an administrative expense. The net expense for the retiree medical commitment remained relativelyunchanged for the three years ended December 31, 2006, 2005 and 2004 atapproximately $1.0 million per year.

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*Reservefor Settlement with ICT Spectrum*

On October 19, 2005, theCompany entered into a settlement agreement with the representatives of theformer stockholders of ICT Spectrum, who had claimed to be entitled toadditional shares of Kaiser Common Stock, to settle all of their outstandingclaims against the Company.  On December6, 2005, the Bankruptcy Court granted final approval of the proposed settlementagreement.  As a result, the Companyissued and distributed 175,003 shares of Kaiser Common Stock to the formerstockholders of ICT Spectrum in December 2005.

Because a settlement agreement, subject to BankruptcyCourt approval, was reached with the former stockholders of ICT Spectrum, atSeptember 30, 2005, we recorded a $6.2 million reserve on our balance sheet toaccount for this non-cash transaction. Upon Bankruptcy Court approval of the settlement agreement in December2005, and the subsequent issuance of 175,003 shares to the former stockholdersof ICT Spectrum in accordance with the settlement agreement, the Companyeliminated the reserve.

*Reserve for Contract Losses*

Due to the results of the ICC arbitration ruling in thesecond quarter of 2006, the Company wrote off the remaining Nova Hut contractreceivable by recording an additional reserve of $3.0 million.

*Reserve for Settlement of Class 4 Claims*

In the first quarter of2004, the Company recorded a $1.4 million reserve for future claim settlementsbased upon the Company’s estimate of unresolved claims at that time.  During 2004 and 2005, the Company settledvarious Class 4 claims utilizing approximately $1.0 million of thisreserve.  Based upon the Company’sestimate of unresolved claims at December 31, 2006, $0.4 million remained inthis reserve and is recorded in other accrued expenses.

*Interest Income*

Weearn interest on our cash, cash equivalents, certificates of deposit andmarketable securities.   In addition, weearned interest on a note receivable from ICF Consulting Group, Inc. (adivision of Old Kaiser that was sold in 1999), through October 5, 2005, when wereceived payment of the entire principal balance and accrued interest on suchnote.

Interestincome for the years ended December 31, 2006, 2005, and 2004 was $1.9 million,$0.7 million and $0.7 million, respectively, which represents an increase of$1.2 million in 2006 and a nominal amount in 2005. Interest income increasedsubstantially in 2006 compared to 2005 due to a substantial increase in theaverage cash balances and other interest earning assets in 2006 as a result ofreceipt of cash distributions from Kaiser-Hill. Similarly, interest income increased in 2005 compared to 2004, albeitnominally, due to a small increase in the average cash balances over theperiod.

*Interest Expense*

As a result of the adoption of Statement of FinancialAccounting Standards No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity” (“SFAS No. 150”),effective July 1, 2003, and the classification of the Series 1 Mandatorily Redeemable Cumulative Preferred Stock (NewPreferred) as a liability, preferred stock dividends are reflected as interestexpense. We incurred no interest expensefor 2006, compared to interest expense for 2005 and 2004 of****$1.2million and $2.1****million, respectively. Thedecrease in interest expense in 2006 is due to redemption of all outstandingpreferred stock in the fourth quarter of 2005.  The decrease in interest expense in 2005compared to 2004 is due to a partial redemption of outstanding preferred stockduring this period.

*Income Taxes*

*During2006, we recognized a total incometax benefit of $****3.6 million, compared to incometax expense of $32.2 million and $1.7 for the years ended December 31, 2005 and2004, respectively.*

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**Liquidityand Capital Resources**

*Years Ended December 31, 2006, 2005and 2004*

Operating Activities: We used $35.5 million in cash for operating activities in 2006, $21.0million in 2005, and $9.8 million in 2004. This use of cash included the following (in thousands):
| ** **                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Administrative costs incurred                         |       | $        | 4,598      |     | $          | 5,920    |       | $ | 5,252 |   |
| Payment of income taxes                               |       | 32,031   |       | 14,602   |       | 1,916    |       |
| Payment of dividends included in continuingoperations |       | —   |       | 1,518    |       | 2,151    |       |
| Other, net                                            |       | (1,121   | )          | (1,058   | )          | 482      |       |
|                                                  |       |     |       |     |       |     |       |
| Cash  used for operating activities                   |       | $        | 35,508     |     | $          | 20,982   |       | $ | 9,801 |   |

 

Investing Activities:  Our primaryinvesting activity has been the receipt of funds from our investment inKaiser-Hill.   During the years endedDecember 31, 2006, 2005 and 2004, Kaiser-Hill distributed $85.0 million, $43.7million, and $17.5 million, respectively, to us and to its other 50% owner,CH2M Hill.  For each of the years endedDecember 31, 2006 and 2004, a $1.0 million certificate of deposit wasreinvested upon maturity. In 2005, we invested $1.0 million in a newcertificate of deposit.   For the yearended December 31, 2006, we invested $9.2 million in marketable securitiesconsisting of floating rate municipal government debt securities.

Financing Activities:  Our primary financing activities have beenthe redemption of New Preferred in accordance with the terms of the Plan ofReorganization and the put rightsdescribed in Note 9 to the consolidated financial statements appearingelsewhere in this report.  The schedulebelow identifies the redemptions of New Preferred and the source of funds utilizedin the redemption.  There was no NewPreferred outstanding or redeemed in 2006. During the years endedDecember 31, 2005 and 2004, we redeemed New Preferred as follows (dollars inthousands):
| **Date of Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Restricted  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| November 2005                    |       | $                                   | 11,409     |                              | $          | —                                |       | $                                    | 11,409     |   | 207,431 |   |
| September 2005                   |       | 4,715                               |       | 785                               |       | 5,500                                 |       | 100,000                              |       |
| April 2005                       |       | 10,000                              |       | —                            |       | 10,000                                |       | 181,818                              |       |
| July 2004                        |       | 2,478                               |       | 512                               |       | 2,990                                 |       | 54,361                               |       |
| February 2004                    |       | 2,599                               |       | 2,677                             |       | 5,276                                 |       | 95,932                               |       |
|                                  |            |                                     |            |                                   |            |                                       |            |                                      |            |  |  |  |

 

Prior to the adoption of SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity”, effective July 1, 2003, dividends were notrecorded as interest expense and were reflected below net income on ourconsolidated statements of operations and were reflected in our consolidatedstatements of cash flows as a financing activity.  During the year ended December 31, 2003, andprior to the above mentioned adoption of SFAS No. 150, we paid $2.2 million individends on our preferred stock.  See “OperatingActivities” above for the amount of preferred stock dividends paid after theadoption of SFAS No. 150.

During 2005 and 2004, approximately $81,000 and $36,000, respectively,was transferred from unrestricted cash to the restricted cash which is areserve for the settlement of unresolved Class 4 claims as required in the Planof Reorganization.

*Liquidity and Capital Resources Outlook*

Wecurrently have no debt as a result of the effectiveness of the Plan of Reorganization.We continue to finance the bankruptcy distribution requirements and follow-onworking capital needs in part through the use of the available cash anddistributions from Kaiser-Hill and from other asset sale proceeds.  Based on (i) current expectations foroperating activities and results, (ii) expected Kaiser-Hill distributions,(iii) our current available cash position, (iv) recent trends and projectionsin liquidity and capital needs, (v) current expectations of total allowedclaims upon the completion of the bankruptcy proceedings (vi) satisfaction ofour obligation to provide future benefits to a fixed group of retirees,management believes we have sufficient liquidity to cover our future operatingneeds and income tax requirements.  With the retirement of the remaining outstandingNew Preferred on November 17, 2005, we no longer have future interestrequirements.

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*Off-BalanceSheet Debt*

We have various obligations andliabilities from our continuing operations, including general overhead expensesin connection with maintaining, operating and winding down variousentities.  Additionally, we believe contingentliabilities may exist in the areas described in Note 15 to the consolidatedfinancial statements appearing elsewhere in this report for each of the yearsended December 31, 2006, 2005 and 2004.

**ContractualObligations**

At December 31,2006, the only known contractual obligations of the Company related to anoncancelable operating lease, under which the Company is obligated to makepayments of $24,000 in 2007 and estimated post retirement benefit planobligations of $6.5 million, projected to be paid out in the next ten years asfollows (in thousands):
| **Contractual Obligations**             | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 Years** | ** ** |
| **Operating Lease Obligations**              |       | $                                         | 24         |   | $ | 24 |   | $ | — |   | $ | — |   | $ | — |   |
| **Post-retirement benefit plan obligations** |       | $                                         | 6,468      |   | $ | 864 |   | 1,457 |   | $ | 1,103 |   | $ | 3,044 |   |
| ** **                                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total**                                    |       | $                                         | 6,490      |   | $ | 888 |   | $ | 1,457 |   | $ | 1,103 |   | $ | 3,044 |   |

 

**Item 7A.**                 Quantitativeand Qualitative Disclosures about Market Risk

We do not believe we have significant exposures tomarket risk. The interest rate risk associated with our obligation to fund acapped retiree medical obligation is not sensitive to interest rate risk otherthan through the determination of the present value of its remaining obligationthereunder.  The company has certificatesof deposit and marketable securities generally at prevailing market rates. A10% hypothetical increase or decrease in the average annual prime rate wouldnot result in a material impact to the company’s financial position or resultsof operations.

**Item 8.**                          ConsolidatedFinancial Statements and Supplementary Data

The Consolidated Financial Statements and SupplementaryData appear on pages F-1 through F-30 and S-1 through S-3 hereto.

**Item 9.**                          Changesin and Disagreements with Accountants on Accounting and Financial Disclosures

None.

**Item 9A.**                 Controlsand Procedures

As of December 31, 2006, an evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the SecuritiesExchange Act of 1934).  Based on thatevaluation, the Company’s management, including the Chief Executive Officer andChief Financial Officer, concluded that the Company’s disclosure controls andprocedures were effective as of December 31, 2006.  There were no significant changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this report that have materially affected, or that arereasonably likely to materially affect, our internal control over financialreporting.

**Item 9B.**                 Other Information

None.

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**PART III**

**Item 10.**                   Directors,Executive Officers and Corporate Governance

Informationrequired by Item 10 regarding nominees and directors appearing under *Proposal No. 2: Election of Directors* in our definitiveproxy statement for our 2007 Annual Meeting of Stockholders (the “2007 ProxyStatement”) is hereby incorporated by this reference. Information regarding ourexecutive officers appearing under *Biographical Informationof Other Executive Officers and Key Employees* is hereby incorporated by reference.Information regarding the Audit Committee and the Audit Committee’s financialexpert appearing under Board *Meetings andCommittees—Audit Committee* in the 2007 Proxy Statement is herebyincorporated by reference.

The information appearing under *Section 16(a) BeneficialOwnership Reporting Compliance* in the 2007 Proxy Statement is herebyincorporated by reference.

The Company’sBoard of Directors has adopted Corporate Governance Principles for the Board ofDirectors and a Corporate Code of Conduct, including Policies on Securities LawCompliance and Transactions in Company Securities.  The Code of Conduct applies to all employees,officers and directors and includes, but is not limited to, the substance ofthe code of ethics required by applicable rules of the SEC**.**  These documents areavailable on the Company’s website at: http://www.kaisergroup.com.

**Item 11.**                   ExecutiveCompensation

Information concerningexecutive compensation required by Item 11 appearing under *ExecutiveCompensation* in the 2007 Proxy Statement is hereby incorporated byreference.  The information concerningCompensation Committee Interlocks appearing under *Compensation Committee Interlocks and Insider Participation inCompensation Decisions*inthe 2007 Proxy Statement is hereby incorporated by reference.

**Item 12.**                   SecurityOwnership and Certain Beneficial Owners and Management and Related StockholderMatters

The information regarding beneficial ownership of Kaiser Common Stockrequired by Item 12 appearing under *Security Ownership ofCertain Beneficial Owners and Management* in the 2007 Proxy Statementis hereby incorporated by reference.

**Securities Authorized for Issuance Under Equity CompensationPlans**

Thefollowing table sets forth information as of December 31, 2006 with respect tocompensation plans under which equity securities of the Company are authorizedfor issuance:
| **Plan Category**                                 | ** ** | **(I)  Number of  securities to be**

** issued upon exercise  of outstanding  options, warrants  and rights** | ** ** | **(II)  Weighted-average  exercise price  of outstanding  options, warrants  and rights** | ** ** | **(III)  Number of  securities remaining  available for future  issuance under equity  compensation plans** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by stockholders     |       | —                                                                                                                                                      |       | —                                                                                                        |       | 135,750                                                                                                                                        |       |
| Equity compensation plans not approved by stockholders |       | —                                                                                                                                                      |       | —                                                                                                        |       | —                                                                                                                                         |       |
| Total                                                  |       | —                                                                                                                                                      |       | —                                                                                                        |       | 135,750                                                                                                                                        |       |

 

**Item 13.**                   CertainRelationships and Related Transactions, and Director Independence

Information concerningrelated party transactions and director independence required by Item 13appearing under *Certain**Relationshipsand Related Transactions* and *Corporate Governance —Director Independence* in the 2007 Proxy Statement is herebyincorporated by reference.

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**Item 14.**                   PrincipalAccountant Fees and Services

Informationrequired by Item 14 concerning the principal accounting fees paid by theCompany and the Audit Committee’s pre-approval policies and proceduresappearing under *Standing Committees of the Board—AuditCommittee* in the 2007 Proxy Statement is hereby incorporated byreference.

 

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**PART IV**

**Item 15.**                   Exhibits,Consolidated Financial Statement Schedules

**(a)****          Documents filed as part of this Report**

**1.     FinancialStatements**

Consolidated Financial Statements of Kaiser GroupHoldings, Inc. and Subsidiaries
|    | ** ** | ** **                                                                                                    | ** ** | **Page**    | ** ** |
|----|------------|---------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| a. |       | Reports  of Independent Registered Public Accounting Firms                                                    |       | F-1, F-2    |       |
| b. |       | Consolidated  Balance Sheets as of December 31, 2006 and December 31, 2005                                    |       | F-3         |       |
| c. |       | Consolidated  Statements of Operations for the years ended December 31, 2006, 2005 and 2004                   |       | F-4         |       |
| d. |       | Consolidated  Statements of Comprehensive (Loss) Income for the years ended December 31,  2006, 2005 and 2004 |       | F-5         |       |
| e. |       | Consolidated  Statements of Shareholders’ Equity for the years ended December 31, 2006,  2005 and 2004   |       | F-5         |       |
| f. |       | Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                   |       | F-6         |       |
| g. |       | Notes to Consolidated Financial Statements                                                                    |       | F-7  - F-20 |       |

** **

**2.     FinancialStatement Schedules**

Supplemental Schedule Relatingto the Consolidated Financial Statements of Kaiser Group Holdings Inc. andSubsidiaries for the years ended December 31, 2006, 2005 and 2004
| a.     |   | Financial  Statements of Kaiser-Hill Company, LLC as of December 31, 2006 and 2005 |   | F-21 - F-30 |   |
|--------|--------|------------------------------------------------------------------------------------|--------|-------------|--------|
|   |   |                                                                               |   |        |   |
| b.     |   | (i)   Reports of Independent Registered Public Accounting Firms               |   | S-1, S-2    |   |
|   |   | (ii) Schedule II: Valuation and Qualifying  Accounts                               |   | S-3         |   |

 

All Schedules except the ones listed above have beenomitted because they are not applicable or not required or because the requiredinformation is included elsewhere in the financial statements in this filing.

**3.     Exhibits (listed according to the numberassigned in the table in Item 601 of Regulation S-K)**

2                                          Second Amended Plan of Reorganization(Incorporated by reference to Exhibit 2 to Current Report on Form 8-K (Registrant No. 1-12248) filed with theSEC on December 14, 2000)

3.1                                 Certificate of Incorporation of Kaiser Group Holdings, Inc. (Incorporated byreference to Exhibit 3(i) to Current Report on Form 8-K (Registrant No.1-12248) filed with the SEC on December 14, 2000)

3.2                             By-laws of Kaiser GroupHoldings, Inc. (Incorporated by reference to Exhibit 3(ii) to Current Report onForm 8-K (Registrant No. 1-12248) filed with the SEC on December 14, 2000)

4                                          Form of Put Agreement relating to preferred stockof Kaiser Group Holdings, Inc. (Incorporated by reference to Exhibit 4 toCurrent Report on Form 8-K (Registrant No. 1-12248) filed with the SEC onDecember 14, 2000)

10.1                           Kaiser Group International, Inc. Employee StockOwnership Plan (as amended and restated as of January 1, 1996)  (Incorporated by reference to Exhibit No.10(b) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the SECon April 17, 2000)

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10.2                           Amendment No. 1 to Kaiser Group International,Inc. Employee Stock Ownership Plan, effective January 1, 1998  (Incorporated by reference to Exhibit No.10(b)(1) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theSEC on April 17, 2000)

10.3                           AmendmentNo. 2 to Kaiser Group International, Inc.Employee Stock Ownership Plan, effective January 1, 1996  (Incorporatedby reference to Exhibit No. 10(b)(2) to Annual Report on Form 10-K (RegistrantNo. 1-12248) filed with the SEC on April 17, 2000)

10.4                           Amendment No. 3 to Kaiser Group International,Inc. Employee Stock Ownership Plan, dated April 19, 1999 (Incorporated byreference to Exhibit No. 10(b)(3) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the SEC on April 17, 2000)

10.5                           Amendment No. 4 to Kaiser Group International,Inc. Employee Stock Ownership Plan dated June 25, 1999 (Incorporated byreference to Exhibit No. 10(b)(4) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the SEC on April 17, 2000)

10.6                           Trust Agreement with Vanguard Fiduciary TrustCompany, dated as of August 31, 1995, in connection with  the ICF Kaiser International, Inc. EmployeeStock Ownership Plan (Incorporated by reference to Exhibit No. 10(c) toRegistration Statement on Form S-1 (Registrant No. 33-64655) filed with the SECon November 30, 1995)

10.7                           ICFKaiser International, Inc. Retirement Plan (as amended and restated as of March1, 1993, and further amended with respect to name change only as of June 26,1993) (Incorporated by reference to Exhibit No. 10(d) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) filed with the SEC on October 15, 1993)

10.8                           Amendment No. 1 to ICF KaiserInternational, Inc. Retirement Plan, dated April 24, 1995 (Incorporated byreference to Exhibit No. 10(d)(1) to Annual Report on Form 10-K (Registrant No.1- 12248) filed with the SEC on May 23, 1995)

10.9                           Amendment No. 2 to ICF KaiserInternational, Inc. Retirement Plan, datedDecember 15, 1995 (Incorporated by reference to Exhibit No. 10(d)(2) toTransition Report on Form 10-K (Registrant No. 1-12248) for the transitionperiod from March 1, 1995 to December 31, 1995 filed with the SEC on March 29,1996)

10.10                     Amendment No. 3 to ICF KaiserInternational, Inc. Retirement Plan, dated December 13, 1996 (Incorporated byreference to Exhibit No. 10(d)(3) to Registration Statement on Form S-1(Registrant No. 333-19519) filed with the SEC on January 10, 1997)

10.11                     Amendment No. 4 to ICF KaiserInternational, Inc. Retirement Plan, datedApril 19, 1999 (Incorporated by reference to Exhibit No. 10(d)(4) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the SEC on April 17,2000)

10.12                     Amendment No. 5 to ICF KaiserInternational, Inc. Retirement Plan, datedJune 25, 1999 (Incorporated by reference to Exhibit No. 10(d)(5) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the SEC on April 17,2000)

10.13                     Amendment No. 6 to ICF KaiserInternational, Inc. Retirement Plan, datedAugust 30, 1999 (Incorporated by reference to Exhibit No. 10(d)(6) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the SEC on April 17,2000)

10.14                 Amendment No. 7 to ICF Kaiser International, Inc.Retirement Plan, dated April 13, 2000 (Incorporated by reference to Exhibit10(d)(7) on Form 8-K (Registrant No. 1-12248) filed with the SEC on May 2, 2000)

10.15                     Amendment No.8 to ICF Kaiser International, Inc. Retirement Plan, dated June 8, 2000(Incorporated by reference to Exhibit 10(d)(8) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) filed with the SEC on September 6, 2000)

10.16                     Amendment No.9 to ICF Kaiser International, Inc. Retirement Plan, dated June 19, 2003(Incorporated by reference to Exhibit 10(c)(9) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) filed with the SEC on August 14, 2003)

10.17                     Amendment No.10 to ICF Kaiser International, Inc. Retirement Plan, dated March 17, 2004(Incorporated by reference to Exhibit 10(c)(10) to Quarterly Report on Form10-Q (Registrant No. 1-12248) filed with the SEC on May 24, 2004)

22

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10.18                     Trust Agreement with Vanguard Fiduciary Trust Company,dated as of August 31, 1995, in connection with the ICF Kaiser International,Inc. Retirement Plan (Incorporated by reference to Exhibit No. 10(e) toRegistration Statement on Form S-1 (Registrant No. 33-64655) filed with the SECon November 30, 1995)

10.19                     ICF KaiserInternational, Inc. Section 401(k) Plan (as amended and restated as of March 1,1993, and further amended with respect to name change only as of June 26, 1993)(Incorporated by reference to Exhibit No. 10(f) to Quarterly Report on Form10-Q (Registrant No. 1-12248) filed with the SEC on October 15, 1993)

10.20                     Amendment No. 1 to ICF KaiserInternational, Inc. Section 401(k) Plan, datedApril 24, 1995 (Incorporated by reference to Exhibit No. 10(p)(1) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the SEC on May 23,1995)

10.21                     Amendment No. 2 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 15, 1995 (Incorporatedby reference to Exhibit No. 10(p)(2) to Transition Report on Form 10-K(Registrant No. 1-12248) for the transition period from March 1, 1995 toDecember 31, 1995 filed with the SEC on March 29, 1996)

10.22                     Amendment No. 3 to ICF KaiserInternational, Inc. Section 401(k) Plan, datedDecember 13, 1996 (Incorporated by reference to Exhibit No. 10(q)(3) toRegistration Statement on Form S-1 (Registrant No. 333-19519) filed with theSEC on January 10, 1997)

10.23                     Amendment No. 4 to ICF KaiserInternational, Inc. Section 401(k) Plan, datedApril 8, 1999 (Incorporated by reference to Exhibit No. 10(k)(4) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the SEC on April 17,2000)

10.24                     Amendment No. 5 to ICF KaiserInternational, Inc. Section 401(k) Plan, datedJune 25, 1999 (Incorporated by reference to Exhibit No. 10(k)(5) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the SEC on April 17,2000)

10.25                     Amendment No. 6 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated April 13, 2000 (Incorporated byreference to Exhibit 10(k)(6) on Form 8-K (Registrant No. 1-12248) filed withthe SEC on May 2, 2000)

 10.26                  Amendment No. 7 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated January 1, 2001 (Incorporated byreference to Exhibit No. 10(m)(7) to Annual Report on Form 10-K (Registrant No.1-2248) filed with the SEC on April 2, 2001)

10.27                     Amendment No. 8 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 10, 2002 (Incorporatedby reference to Exhibit 10(e)(8) to Quarterly Report on Form 10-Q (RegistrantNo. 1-12248) filed with the SEC on August 14, 2003)

10.28                     Amendment No. 9 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated June 19, 2003 (Incorporated byreference to Exhibit 10(e)(9) to Quarterly Report on Form 10-Q (Registrant No.1-12248) filed with the SEC on August 14, 2003)

10.29                     Amendment No. 10 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated March 17, 2004 (Incorporated byreference to Exhibit 10(e)(10) to Quarterly Report on Form 10-Q (Registrant No.1-12248) filed with the SEC on May 24, 2004)

10.30                     Amendment No. 11 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated November 11, 2004 (Incorporatedby reference to Exhibit 10(e)(11) to Quarterly Report on Form 10-Q (RegistrantNo. 1-12248) filed with the SEC on November 15, 2004)

10.31                     Amendment No. 12 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 12, 2005 (Incorporatedby reference to Exhibit 10.31 to Annual Report on Form 10-K (Registrant No.1-12248) filed with the SEC on March 28, 2006)*

10.32                     Amendment No. 13 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 30, 2005 (Incorporatedby reference to Exhibit 10.31 to Annual Report on Form 10-K (Registrant No.1-12248) filed with the SEC on March 28, 2006)*

23

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10.33                     Amendment No. 14 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated January 18, 2006 (Incorporatedby reference to Exhibit 10.31 to Annual Report on Form 10-K (Registrant No.1-12248) filed with the SEC on March 28, 2006)*

10.34                     Amendment No. 1 to Kaiser AnalyticalManagement Services, Inc. Section 401(k) Plan, dated February 15, 2006(Incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K(Registrant No. 1-12248) filed with the SEC on March 28, 2006)*

10.35                     Trust Agreement with Vanguard Fiduciary TrustCompany, dated as of March 1, 1989, in connection with the ICF KaiserInternational, Inc. Section 401(k) Plan (Incorporated by reference to ExhibitNo. 28(b) to Registration Statement on Form S-8 (Registrant No. 33-51460) filedwith the SEC on August 31, 1992)

10.36                     Contract between Kaiser-Hill Company, LLC and theU.S. Department of Energy dated January 24, 2000 (Incorporated by reference toExhibit No. 10(o) to Annual Report on Form 10-K (Registrant No. 1-12248) filedwith the SEC on April 17, 2000)

10.37                     ModificationM116 to Contract between Kaiser-HillCompany, LLC and the U.S. Department of Energy  , effective March 24, 2004 (Incorporated byreference to Exhibit 10(g)(1) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the SEC on March 30, 2004)

10.38                     Assignment ofMembership Interest in Hunters Branch Leasing, LLC by and between KaiserHoldings Unlimited, Inc. (Assignor) andNutley Partners, LC (Assignee), dated January 1, 2001 (Incorporated byreference to Exhibit No. 10(i) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the SEC on April 2, 2001)

10.39                      Subcontract between The S.M. Stoller Corporationand Kaiser Group Holdings, Inc., dated June 30, 2004 (Incorporated byreference to Exhibit No. 10(i) to Quarterly Report on Form 10-Q (Registrant No.1-12248) filed with the SEC on August 13, 2004)

10.40                     Kaiser Group Holdings, Inc. 2002Equity Compensation Plan, as amended (Incorporated by reference to Exhibit No.10 to Registration Statement on Form S-8 (Registration No. 333-107912) filedwith the SEC on August 13, 2003)*

10.41                     Amended andRestated Employment Agreement with John T. Grigsby, Jr., President and ChiefExecutive Officer, effective as of December 18, 2000 (Incorporated by referenceto Exhibit No. 10(m) to Registration Statement on Form S-4 (Registrant No.333-100640) filed with the SEC on October 18, 2002)*

10.42                     TransitionAgreement between Kaiser Group Holdings, Inc. and John T. Grigsby, Jr.effective as of August 31, 2004 (Incorporated by reference to Exhibit 99 toCurrent Report on Form 8-K (Registration No. 1-12248) filed with the SEC onSeptember 1, 2004)*

10.43                     Separation Agreement betweenKaiser Group Holdings, Inc. and Marian P. Hamlett effective February 8, 2006(Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K(Registration No. 1-2248) filed with the SEC on February 9, 2006*

10.44                     Executive Employment Agreementbetween Kaiser Group Holdings, Inc. and Douglas W. McMinn, effective December4, 2006*

10.45                     Executive Employment Agreementbetween Kaiser Group Holdings, Inc. and Dr. Nicholas Burakow, effectiveDecember 4, 2006*

21                                    Subsidiariesof the Registrant as of March 20, 2007

23.1                           Consentof Independent Registered Public Accounting Firm

23.2                           Consentof experts and counsel (PricewaterhouseCoopers)

23.3                           Consentof experts and counsel (KPMG)

31.1                           Certification of ChiefExecutive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the SecuritiesExchange Act of 1934, as amended

24

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31.2                           Certification of ChiefFinancial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the SecuritiesExchange Act of 1934, as amended

32.1         Certificationof Chief Executive Officer, pursuant to 18 U.S.C. Section 1350

32.2         Certification of Chief Financial Officer, pursuant to 18U.S.C. Section 1350

----

*******                    Represents Compensation Arrangements**

25

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized.
|        |   | KAISER GROUP HOLDINGS, INC. |
|--------|--------|-----------------------------|
|   |   |                        |   |   |
|   |   |                        |   |   |
|   |   | By:                         |   | /s/ Douglas W. McMinn |
|   |   |                        |   | Name: Douglas W. McMinn |
|   |   |                        |   | Title: President and Chief Executive Officer |

 

March 30, 2007

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporton Form 10-K has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

(1)  Principal executive officer

| /s/ Douglas W. McMinn                 |   |   | March 30, 2007 |
|---------------------------------------|--------|--------|----------------|
| Douglas W. McMinn                     |   |   |
| President and Chief Executive Officer |   |   |

 

(2)Principal financial and accounting officer

| /s/ Nicholas Burakow                               |   |   | March 30, 2007 |
|----------------------------------------------------|--------|--------|----------------|
| Nicholas Burakow                                   |   |   |
| Executive Vice President, Chief Financial Officer, |   |   |
| and Treasurer                                      |   |   |

 

(3)  Board of Directors

| /s/ Douglas W. McMinn      |   |   | March 30, 2007 |
|----------------------------|--------|--------|----------------|
| Douglas W. McMinn          |   |   |
| Director                   |   |   |
|                       |   |   |
| /s/ Mark S. Tennenbaum     |   |   | March 30, 2007 |
| Mark S. Tennenbaum         |   |   |
| Director                   |   |   |
|                       |   |   |
| /s/ Frank E. Williams, Jr. |   |   | March 30, 2007 |
| Frank E.  Williams, Jr.    |   |   |
| Director                   |   |   |

 

26

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsandShareholders of Kaiser Group Holdings, Inc.

We have audited the accompanying consolidated balancesheet of Kaiser Group Holdings, Inc. and its subsidiaries (the “Company”) as ofDecember 31, 2006, and the related consolidated statements of operations,comprehensive (loss) income, shareholders’ equity and cash flows for the yearended December 31, 2006.  Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit. We did not audit the financialstatements of Kaiser-Hill Company, LLC and subsidiary, a 50 percent-ownedlimited liability corporation which is reflected in the Company’s consolidatedbalance sheet as an investment in and advances to joint venture constituting$2.3 million of the consolidated total assets as of December 31, 2006, andequity loss in earnings of joint venture of $33,000 for the year ended December31, 2006.  Those statements were auditedby other auditors whose report has been furnished to us, and our opinion,insofar as it relates to the amounts included for Kaiser-Hill Company, LLC andsubsidiary, is based solely on the report of the other auditors.

We conducted our audit in accordance with thestandards of the Public Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit and the report ofthe other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report ofthe other auditors, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of KaiserGroup Holdings, Inc. and its subsidiaries at December 31, 2006, and theresults of their operations and their cash flows for the year ended December31, 2006 in conformity with accounting principles generally accepted in theUnited States of America.

/s/ Stegman & Company

Baltimore, MarylandMarch 26, 2007

F-1

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsandShareholders of Kaiser Group Holdings, Inc.

We have audited the accompanying consolidated balancesheet of Kaiser Group Holdings, Inc. and its subsidiaries (the Company) as ofDecember 31, 2005, and the related consolidated statements of operations,comprehensive (loss) income shareholders’ equity and cash flows for each of thetwo years ended in the period ended December 31, 2005. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits. We did not audit the financial statements ofKaiser-Hill Company, LLC and subsidiary, a 50 percent-owned limited liabilitycorporation which is reflected in the Company’s consolidated balance sheet asan investment in and advances to joint venture constituting $87.3 million ofthe consolidated total assets as of December 31, 2005, and equity income inearnings of joint venture of $88.7 million for the year ended December 31,2005.  Those statements were audited byother auditors whose report has been furnished to us, and our opinion, insofaras it relates to the amounts included for Kaiser-Hill Company, LLC andsubsidiary, is based solely on the report of the other auditors.

We conducted our audit in accordance with thestandards of the Public Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit and the report ofthe other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report ofthe other auditors, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of KaiserGroup Holdings, Inc. and its subsidiaries at December 31, 2005, and theresults of its operations and its cash flows for each of the two years endedDecember 31, 2005 in conformity with accounting principles generally acceptedin the United States of America.

/s/ PricewaterhouseCoopers LLP

McLean, VirginiaMarch 20, 2006

F-2

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**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts)**
| ** **                                                                                                            | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current Assets                                                                                                        |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                            |       | $                           | 55,779     |                        | $          | 14,633 |   |
| Certificates of deposit                                                                                               |       | 1,268                       |       | 2,040                       |       |
| Marketable securities —  available for sale                                                                      |       | 9,175                       |       | —                      |       |
| Restricted cash and  cash equivalents                                                                                 |       | 3,332                       |       | 3,178                       |       |
| Accounts receivable                                                                                                   |       | 35                          |       | 203                         |       |
| Prepaid expenses and  other current assets                                                                            |       | 471                         |       | 606                         |       |
| Income taxes receivable                                                                                               |       | 8,452                       |       | —                      |       |
| Contract receivable,  net                                                                                             |       | —                      |       | 3,000                       |       |
| Total Current  Assets                                                                                                 |       | 78,512                      |       | 23,660                      |       |
|                                                                                                                  |       |                        |       |                        |       |
| Other Assets                                                                                                          |       |                        |       |                        |       |
| Investment in and  advances to joint venture                                                                          |       | 2,278                       |       | 87,310                      |       |
| Investment in  affiliates                                                                                             |       | 2,800                       |       | 2,800                       |       |
| Deferred tax asset                                                                                                    |       | 2,909                       |       | 8,215                       |       |
| Other long-term assets                                                                                                |       | —                      |       | 39                          |       |
| Total Other  Assets                                                                                                   |       | 7,987                       |       | 98,364                      |       |
|                                                                                                                  |       | $                           | 86,499     |                        | $          | 122,024 |   |
| ** **                                                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                        | ** ** | ** **                  | ** ** | ** **                  | ** ** |
|                                                                                                                  |       |                        |       |                        |       |
| Current Liabilities                                                                                                   |       |                        |       |                        |       |
| Accounts payable                                                                                                      |       | $                           | 168        |                        | $          | 239 |   |
| Post retirement benefit  plan obligation                                                                              |       | 6,468                       |       | 6,924                       |       |
| Other accrued expenses                                                                                                |       | 3,001                       |       | 3,435                       |       |
| Dividend payable on  common stock                                                                                     |       | 10,745                      |       | —                      |       |
| Income taxes payable                                                                                                  |       | —                      |       | 32,315                      |       |
| Total Current  Liabilities                                                                                            |       | 20,382                      |       | 42,913                      |       |
|                                                                                                                  |       |                        |       |                        |       |
| Commitments and  Contingencies                                                                                        |       |                        |       |                        |       |
|                                                                                                                  |       |                        |       |                        |       |
| Shareholders’ Equity                                                                                             |       |                        |       |                        |       |
| Common stock, par value  $.01 per share:                                                                              |       |                        |       |                        |       |
| Authorized—3,000,000  shares                                                                                     |       |                        |       |                        |       |
| Issued and  outstanding—1,790,890 and 1,787,640 shares at December 31, 2006 and December  31, 2005, respectively |       | 18                          |       | 18                          |       |
| Capital in excess of  par                                                                                             |       | 11,796                      |       | 14,337                      |       |
| Retained earnings                                                                                                     |       | 54,263                      |       | 64,716                      |       |
| Accumulated other  comprehensive income                                                                               |       | 40                          |       | 40                          |       |
| Total  Shareholders’ Equity                                                                                      |       | 66,117                      |       | 79,111                      |       |
| Total Liabilities and  Shareholders’ Equity                                                                      |       | $                           | 86,499     |                        | $          | 122,024 |   |

 

See notes to consolidatedfinancial statements.

F-3

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**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                                                                                                                       | ** ** | **For the Years Ended December 31,**         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                       | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                                                                                                                                             |       |                                                                  |       |   |   |   |   |
| Gross Revenue                                                                                                                                                    |       | $                                                                     | 222        |   | $ | 1,807 |   | $ | 1,036 |   |
| Subcontract and direct material costs                                                                                                                            |       | 504                                                                   |       | 1,177 |   | 748 |   |
| Service (Loss)  Income                                                                                                                                           |       | (282                                                                  | )          | 630 |   | 288 |   |
|                                                                                                                                                             |       |                                                                  |       |   |   |   |   |
| Operating  Expenses                                                                                                                                              |       |                                                                  |       |   |   |   |   |
| Reserve for contract losses                                                                                                                                      |       | 3,000                                                                 |       | — |   | — |   |
| Reserve for settlement of remaining Class 4 claims                                                                                                               |       | —                                                                |       | — |   | 1,400 |   |
| Reserve for settlement with ICT Spectrum                                                                                                                         |       | —                                                                |       | 6,196 |   | — |   |
| Reversal of reserve for Settlement of Remaining  Class 4 Claims                                                                                                  |       | —                                                                |       | (223 | ) | — |   |
| Administrative expenses                                                                                                                                          |       | 4,598                                                                 |       | 5,920 |   | 5,252 |   |
| Operating Loss                                                                                                                                                   |       | (7,880                                                                | )          | (11,263 | ) | (6,364 | ) |
| Other Income  (Expense)                                                                                                                                          |       |                                                                  |       |   |   |   |   |
| Equity (loss) income in earnings of joint venture,  net of amortization of $0, $7,048 and $3,524 for years ended December 31,  2006, 2005 and 2004, respectively |       | (33                                                                   | )          | 88,667 |   | 16,806 |   |
| Reduction of reserve for note receivable                                                                                                                         |       | —                                                                |       | 548 |   | — |   |
| Other income                                                                                                                                                     |       | —                                                                |       | — |   | 25 |   |
| Interest income                                                                                                                                                  |       | 1,915                                                                 |       | 710 |   | 698 |   |
| Interest expense for preferred dividends                                                                                                                         |       | —                                                                |       | (1,205 | ) | (2,055 | ) |
| (Loss) Income  Before income tax                                                                                                                                 |       | (5,998                                                                | )          | 77,457 |   | 9,110 |   |
| Income tax benefit (expense)                                                                                                                                     |       | 3,630                                                                 |       | (32,165 | ) | (1,735 | ) |
| Net (Loss)  Income                                                                                                                                               |       | $                                                                     | (2,368     | ) | $ | 45,292 |   | $ | 7,375 |   |
|                                                                                                                                                             |       |                                                                  |       |   |   |   |   |
| Basic and  Diluted (Loss) Earnings Per Common Share                                                                                                              |       | $                                                                     | (1.32      | ) | $ | 27.86 |   | $ | 4.58 |   |
|                                                                                                                                                             |       |                                                                  |       |   |   |   |   |
| Weighted average  shares for basic and diluted earnings per common share                                                                                         |       | 1,790                                                                 |       | 1,626 |   | 1,610 |   |
|                                                                                                                                                             |       |                                                                  |       |   |   |   |   |
| Dividends declared per  share                                                                                                                                    |       | $                                                                     | 6.00       |   | $ | — |   | $ | — |   |

 

See notes to consolidated financial statements.

F-4

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**KAISER GROUP HOLDINGS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME**(In thousands)
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (Loss) Income                         |       | ($2,368                                     | )          | $ | 45,292 |   | $ | 7,375 |   |
| Other Comprehensive Income (Loss)         |       |                                        |       |   |   |   |   |
| Foreign currency translation  adjustments |       | —                                      |       | (2 | ) | 5 |   |
| Total Comprehensive (Loss) Income         |       | ($2,368                                     | )          | $ | 45,290 |   | $ | 7,380 |   |

** **

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITYFor the years ended December 31, 2006, 2005 and 2004**(In thousands, exceptshare amounts)
| ** **                                | ** ** | ** **            | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **        | ** ** | **Accumulated** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                                | ** ** | ** **            | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **        | ** ** | **Other**       | ** ** |
| ** **                                | ** ** | **Common Stock** | ** ** | **Capital In** | ** ** | **Retained**                | ** ** | **Comprehensive** | ** ** |
| ** **                                | ** ** | **Shares**            | ** ** | **Par Value**  | ** ** | **Excess of Par** | ** ** | **Earnings**      | ** ** | **Income**      | ** ** |
| Balance, January 1, 2004                  |       | 1,605,869             |       | $                   | 16         |                        | $          | 7,975             |       | $               | 12,049     |   | $ | 37 |   |
| Net income                                |       | —                |       | —              |       | —                      |       | 7,375             |       | —          |       |
| Issuances of common stock                 |       | 4,000                 |       | —              |       | 88                          |       | —            |       | —          |       |
| Foreign currency translation  adjustment  |       | —                |       | —              |       | —                      |       | —            |       | 5               |       |
|                                      |       |                  |       |                |       |                        |       |              |       |            |       |
| Balance, December 31, 2004                |       | 1,609,869             |       | 16                  |       | 8,063                       |       | 19,424            |       | 42              |       |
| Net income                                |       | —                |       | —              |       | —                      |       | 45,292            |       | —          |       |
| Issuances of common stock                 |       | 3,000                 |       | —              |       | 78                          |       | —            |       | —          |       |
| Settlement of ICT Spectrum  claim         |       | 175,003               |       | 2                   |       | 6,196                       |       | —            |       | —          |       |
| Cancellation of common stock,  net        |       | (232                  | )          | —              |       | —                      |       | —            |       | —          |       |
| Foreign currency translation  adjustment  |       | —                |       | —              |       | —                      |       | —            |       | (2              | )          |
|                                      |       |                  |       |                |       |                        |       |              |       |            |       |
| Balance, December 31, 2005                |       | 1,787,640             |       | 18                  |       | 14,337                      |       | 64,716            |       | 40              |       |
| Net (loss)                                |       | —                |       | —              |       | —                      |       | (2,368            | )          | —          |       |
| Issuance of common stock                  |       | 3,250                 |       | —              |       | 119                         |       | —            |       | —          |       |
| Cancellation of preferred  treasury stock |       | —                |       | —              |       | (2,660                      | )          | 2,660             |       | —          |       |
| Dividends ($6.00 per common  share)       |       | —                |       | —              |       | —                      |       | (10,745           | )          | —          |       |
|                                      |       |                  |       |                |       |                        |       |              |       |            |       |
| Balance,  December 31, 2006               |       | 1,790,890             |       | $                   | 18         |                        | $          | 11,796            |       | $               | 54,263     |   | $ | 40 |   |

 

See notes to consolidated financial statements.

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**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                     | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                                       | ** ** |
| Operating  Activities                                                          |       |                                                          |       |   |   |   |   |
| Net (loss)  income                                                             |       | $                                                             | (2,368     | ) | $ | 45,292 |   | $ | 7,375 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                                          |       |   |   |   |   |
| Reserve for contract losses                                                    |       | 3,000                                                         |       | — |   | — |   |
| Reserve for ICT Spectrum settlement                                            |       | —                                                        |       | 6,196 |   | — |   |
| Reversal of note receivable reserve                                            |       | —                                                        |       | (548 | ) | — |   |
| Deferred taxes                                                                 |       | 5,306                                                         |       | (13,987 | ) | (723 | ) |
| Equity loss (income) in earnings of joint venture                              |       | 33                                                            |       | (88,667 | ) | (16,806 | ) |
| Changes in operating assets and liabilities:                                   |       |                                                          |       |   |   |   |   |
| Accounts receivables, net                                                      |       | 168                                                           |       | 14 |   | (217 | ) |
| Prepaid expenses and other current assets                                      |       | 135                                                           |       | 136 |   | 229 |   |
| Income taxes receivable                                                        |       | (8,452                                                        | )          | — |   | — |   |
| Accounts payable and accrued expenses                                          |       | (961                                                          | )          | (664 | ) | (237 | ) |
| Income taxes payable                                                           |       | (32,315                                                       | )          | 31,552 |   | 488 |   |
| Other operating activities                                                     |       | (54                                                           | )          | (306 | ) | 90 |   |
| Net Cash Used in Operating Activities Before  Reorganization Items             |       | (35,508                                                       | )          | (20,982 | ) | (9,801 | ) |
|                                                                           |       |                                                          |       |   |   |   |   |
| Investing  Activities                                                          |       |                                                          |       |   |   |   |   |
| Distributions from 50% owned joint venture                                     |       | 85,000                                                        |       | 43,650 |   | 17,500 |   |
| Purchases of marketable securities                                             |       | (9,175                                                        | )          | — |   | — |   |
| Purchase of certificates of deposit                                            |       | (1,259                                                        | )          | (1,000 | ) | (1,000 | ) |
| Maturity of certificates of deposit                                            |       | 2,088                                                         |       | — |   | 1,000 |   |
| Collection of note receivable                                                  |       | —                                                        |       | 6,442 |   | — |   |
| Net Cash Provided by Investing Activities                                      |       | 76,654                                                        |       | 49,092 |   | 17,500 |   |
|                                                                           |       |                                                          |       |   |   |   |   |
| Financing  Activities                                                          |       |                                                          |       |   |   |   |   |
| Transfer to restricted cash                                                    |       | —                                                        |       | (81 | ) | (36 | ) |
| Transfer from restricted cash for the redemption of  preferred stock           |       | —                                                        |       | 785 |   | 3,189 |   |
| Redemption of preferred stock                                                  |       | —                                                        |       | (26,909 | ) | (8,266 | ) |
| Net Cash Used in Financing Activities                                          |       | —                                                        |       | (26,205 | ) | (5,113 | ) |
|                                                                           |       |                                                          |       |   |   |   |   |
| Increase in Cash  and Cash Equivalents                                         |       | 41,146                                                        |       | 1,905 |   | 2,586 |   |
| Cash and Cash  Equivalents at Beginning of Period                              |       | 14,633                                                        |       | 12,728 |   | 10,142 |   |
|  Cash and Cash Equivalents at End of Period                               |       | $                                                             | 55,779     |   | $ | 14,633 |   | $ | 12,728 |   |

 

See notes to consolidated financial statements.

F-6

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**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

1.             Basisof Presentation

Kaiser Group Holdings,Inc. (“Kaiser Group Holdings” or the “Company”) is a Delaware corporation thatwas formed on December 6, 2000 for the purpose of owning all of the outstandingstock of Kaiser Group International, Inc. (“Old Kaiser”), which in turncontinues to own the stock of its remaining subsidiaries. On June 9, 2000, OldKaiser and 38 of its domestic subsidiaries voluntarily filed for protectionunder Chapter 11 of the United States Bankruptcy Code in the District ofDelaware (case nos. 00-2263 to 00-2301). Old Kaiser emerged from bankruptcywith an approved plan of reorganization (which was its Second Amended Plan ofReorganization and is referred to in this report as the “Plan of Reorganization”)that was effective on December 18, 2000 (the “Effective Date”).  The Company is deemed a “successor issuer” toOld Kaiser by virtue of Rule 12g-3(a) under the Securities Exchange Act of1934. A summary of the Plan of Reorganization for Old Kaiser can be found in aCurrent Report on Form 8-K dated December 5, 2000 filed by Old Kaiser.  In thisreport, unless the context states otherwise, the terms “we”, “our” and “Kaiser”refer to Kaiser Group Holdings (including Old Kaiser as its predecessor) andits subsidiaries.

As ofDecember 31, 2006, apart from resolving remaining bankruptcy claims, the Company had only a limited number ofactivities, assets and liabilities, primarily consisting of:

·                  the ownership ofa 50% interest in Kaiser-Hill Company, LLC (“Kaiser-Hill”), which serves as thegeneral contractor at the U.S. Department of Energy’s (“DOE”) Rocky Flats sitenear Denver, Colorado for the performance of a contract for the closure of thesite (the “Closure Contract”) (See Note 6).

·                  thecloseout of a completed contract for the engineering and construction of asteel mini-mill in the Czech Republic for Nova Hut (“Nova Hut”) (See Note 4).

·                  a wholly-ownedcaptive insurance company that has not beenissuing new policies since October 1, 2000 and has solely been involved inresolving remaining claims made against previously issued policies.  In the fourth quarter of 2004, the Companyreceived regulatory approval and finalized the formation documents of asponsored captive subsidiary, MS Builders Insurance Company, to enable ourwholly-owned captive insurance company to offer derivative captive insuranceservices to third party clients.  As ofMarch 20, 2007, MS Builders Insurance Company has not written any policies.

·                  anongoing obligation to fund a capped, post-retirement medical benefit plan for afixed number of retirees (See Note 12).

Kaiser AnalyticalManagement Services, Inc. (“KAMS”), accounted for all of the Company’s grossrevenue in 2006.  Under prevailing marketconditions, the Company determined that there were insufficient businessprospects for KAMS to expect future revenues.

The Companyadopted fresh start reporting in its consolidated balance sheet as of December31, 2000. The American Institute of Certified Public Accountants’ Statement ofPosition 90-7, “Financial Reporting by Entities in Reorganization Under theBankruptcy Code” (“SOP 90-7”), requires under certain circumstances resultingfrom a bankruptcy the creation of a new entity for financial reporting purposesupon the emergence of an entity from bankruptcy.  Accordingly, the value of the reorganizedenterprise becomes the established amount for the emerging balance of shareholders’equity, and any accumulated deficit of the predecessor entity is offset againstavailable capital in excess of par, resulting in an emerging retained earningsof zero.  Additionally, assets andliabilities are recorded at their fair values.

The value of theemerged enterprise used for fresh start reporting as of December 31, 2000 was$87.5 million. It was determined by management with the assistance ofindependent advisors.  The methodologyemployed involved estimation of the enterprise value taking into considerationa discounted cash flow analysis.  Thediscounted cash flow analysis was based on a seven-year cash flow projectionprepared by management, taking into consideration the terminal value of itsassets and liabilities as of immediately prior to its emergence from bankruptcyon December 18, 2000.  Terminal values ofassets and liabilities were determined based either on contracted amounts,actuarial present values and/or management’s estimates of the outcome ofcertain operating activities. Net after-tax cash flows, assuming a 40%effective tax rate, were discounted at 17% in order to take into considerationthe risks and uncertainties inherent in such projections.  The cash flow projections were based onestimates and assumptions about circumstances and events that had not yet takenplace.  Estimates and assumptionsregarding individual retained matters which form the collective composition ofthe overall enterprise value as of December 18, 2000 are inherently subject tosignificant economic and competitive uncertainties and contingencies beyond thecontrol of 

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the Company.  Accordingly, there may be differences betweenprojections and actual results because events and circumstances frequently donot occur as expected and may be significant. More specifically, assumptions within the valuation related to theamount and timing of the ultimate performance and related cash flows of theCompany’s investment in Kaiser-Hill have the greatest impact on the overallenterprise valuation.

2.             GeneralTerms of Plan and Status of Bankruptcy Distributions

The effectiveness of thePlan of Reorganization as of December 18, 2000 did not, in and of itself,complete the bankruptcy process. The process of resolving claims initiallyfiled in the bankruptcy is ongoing.

By far the largest classof claims (“Class 4”) was made up of creditor claims other than trade creditoror equity claims.  Class 4 claimsincluded holders of Old Kaiser’s senior subordinated notes due 2003.  Holders of Class 4 claims allowed by the BankruptcyCourt received a combination of cash and Company preferred (“New Preferred”)and common stock (“Kaiser Common Stock”) in respect of their claims.  Each Class 4 claimant was entitled to receiveone share of New Preferred and one share of Kaiser Common Stock for each $100of claims, subject to a reduction in the number of shares of New Preferredissued to such claimant by one share for each $55.00 of cash received by theclaimant.

Pursuant to the terms ofthe Plan of Reorganization, the Company was required to complete its initialbankruptcy distribution within 120 days of the Effective Date.  Accordingly, to satisfy approximately $136.8million of allowed Class 4 claims, the Company effected its initial distributionon April 17, 2001.  The amount of unresolvedClass 4 claims remaining at April 17, 2001 was approximately $130.5 million. Toaddress the remaining unresolved claims, the Bankruptcy Court issued an orderon March 27, 2001 establishing an Alternative Dispute Resolution (“ADR”)procedure whereby the remaining claimants and Old Kaiser produced limitedsupporting data relative to their respective positions and engaged in initialnegotiation efforts in an attempt to reach an agreed claim determination.  If necessary, the parties were thereafter requiredto participate in a non-binding mediation before a mediator pre-selected by theBankruptcy Court.  All unresolved claimsas of March 27, 2001 are subject to the ADR process. Since April 17, 2001, thedate of the initial distribution, approximately $130.1 million of assertedClass 4 claims have been withdrawn, negotiated or mediated to an agreed amount,resulting in cash payments approximating $2.8 million and issuances of 683shares of New Preferred (all of which have been redeemed) and 823 shares ofKaiser Common Stock.  As of December 31,2006, the aggregate amount of unresolved claims was approximately $0.4 million.

The equity class ofclaims recognized in the Old Kaiser bankruptcy are “Class 5” claims, consistingof holders of Old Kaiser common stock (“Old Common”) and other “EquityInterests” as defined in the Plan of Reorganization. The Plan of Reorganizationprovides that holders of Equity Interests receive a number of shares of KaiserCommon Stock equal to 17.65% of the number of shares of Kaiser Common Stockissued to allowed Class 4 claimants. In the initial distribution, one share ofKaiser Common Stock was issued for each 96 shares of previously outstanding OldCommon.  During 2005, the Company settleda significant Class 5 claim asserted by the former stockholders of ICT SpectrumConstructors, Inc. (“ICT Spectrum”), which Old Kaiser had acquired in 1998, andissued an aggregate of 175,003 additional shares of Kaiser Common Stock to suchclaimants pursuant to the settlement. With the settlement of the ICT SpectrumClass 5 claim and the subsequent issuance of 175,003 shares of Kaiser CommonStock to such claimants, no Class 5 claims remain unresolved at December 31,2006.

As of December 31, 2006,the aggregate amount of unresolved claims was approximately $0.4 million and isincluded in other accrued expenses.  Asdemonstrated by the claim settlements completed since April 17, 2001, and basedon the belief that it is in the best interest of the Company and its currentstockholders, the Company has been settling certain remaining Class 4 claimsentirely for cash payments in lieu of the combination of cash and New Preferredand Kaiser Common Stock as contemplated in the Plan of Reorganization.  The Company intends to continue to use thissettlement alternative during the resolution of remaining Class 4 claims.  The Company expects to resolve the remainingclaims, and to reach a final resolution of issues related to the retireebenefit plans by the end of 2007.  Uponsuch final resolution, the Company expects to take the necessary steps to closethe bankruptcy cases.  Upon such closing,the Bankruptcy Court would no longer be involved in the administration of theCompany’s affairs, and the Company’s obligation to pay certain fees and submitperiodic reports to the Bankruptcy Court would be terminated.  Since closing of the cases requiresresolution of all outstanding matters and such resolution is somewhat out ofthe Company’s control, there is a possibility that the cases will not be closedwithin the anticipated time period.

In the first quarter of2004, the Company recorded a $1.4 million liability for future claimsettlements based upon the Company’s estimate of unresolved claims at thattime.  Since 2004, the Company hassettled various Class 4 claims reducing approximately $1.0 million of thisliability.  Based upon the Company’sestimate of unresolved claims at December 31, 2006, $0.4 million remains inthis reserve and is recorded in other accrued expenses.

F-8

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3.             SignificantAccounting Policies

Principles ofConsolidation: The consolidated financial statements include all majority-ownedor controlled subsidiaries. All significant intercompany balances andtransactions have been eliminated. Investments in unconsolidated affiliated companies and joint venturesare accounted for using the equity method.

Revenue Recognition: The Company earns its revenue from a monthly management fee plus profitsharing contract.  The company recognizesrevenue earned from the monthly management fee for this contract on astraight-line basis and recognizes the profit sharing income as the income isearned.

Marketable Securities: The Company classifies all of itsmarketable securities as available-for-sale.

Available-for-sale securities are recorded at fairvalue, determined at a specific point in time based on quoted market rates.Unrealized gains and losses, net of the related tax effect, on securitiesclassified as available-for-sale are excluded from the determination of netincome and are reported as a separate component of shareholders’ equity, withinother comprehensive income, until realized. Declines in the fair value ofmarketable securities below their cost that are other than temporary arereflected in net income as realized.

Marketable securities at December 31, 2006 consisted offloating rate municipal government debt securities with a fair value of $9.2million and maturities exceeding 10 years. Unrealized gains and losses were notmaterial for any of the periods presented. At December 31, 2006, the carryingvalue of marketable securities approximates their fair value. There were nomarketable securities held as of December 31, 2005.

Income Taxes: Deferred tax assets and liabilitiesrepresent the tax effects of differences between the financial statement carryingamounts and the tax bases carrying amounts of the Company’s assets andliabilities. These differences are calculated based upon the statutory taxrates in effect in the years in which the differences are expected to reverse.The effect of subsequent changes in tax rates on deferred tax balances isrecognized in the period in which a tax rate change is enacted. The Companyevaluates its ability to realize future benefit from all deferred tax assetsand establishes valuation allowances for amounts that may not be realizable.

Earnings Per Share: Basic earnings per share (“EPS”) is computed by dividing net (loss)income by the weighted average number of common shares outstanding for theperiod. Diluted EPS normally includes the weighted-average effect of dilutivesecurities outstanding during the period. Pursuant to the Plan of Reorganization that was effective as of December18, 2000, all then-outstanding common stock equivalents were cancelled.  As a result, the Company has no dilutive oranti-dilutive securities outstanding.

Share reconciliation: As previously disclosed in the Company’s annual report on Form 10-K forthe year ended December 31, 2005, since 2001, the Company has beenattempting to reconcile the number of shares that were issued by the Company’stransfer agent in the initial distribution in 2001.  The Company has not previously recognized theissuance of 11,599 shares of Kaiser Common Stock by the transfer agent.  Because the Company has been unsuccessful indisputing the issuance of these shares, during 2005 the Company retroactivelyrestated the number of outstanding shares to reflect the issuance of the 11,599shares as of June 2001.  For purposes ofthe December 31, 2006 and December 31, 2005 financial statements weightedaverage shares for basic and diluted earnings per share were 1,790,390 and1,625,851, respectively.

As discussed in Note 8, the Company adopted SFAS No. 150effective July 1, 2003.  Therefore, thepreferred stock dividends of $1.2 million for the year ended December 31, 2005,and the $2.1 million for the year ended December 31, 2004 have been shown asinterest expense.

Foreign Currency Translation:  Results of operations for foreign entitiesare translated using the average exchange rates during the period. Assets andliabilities are translated to U.S. dollars using the exchange rate in effect atthe balance sheet date. Resulting translation adjustments are reflected net oftax in shareholders’ equity as cumulative translation adjustments.

F-9

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Cash Equivalents and Restricted Cash: The Companyconsiders all highly liquid financial instruments purchased with maturities ofthree months or less at date of purchase to be cash equivalents. The Companymaintains cash and cash equivalent balances with financial institutions in excessof federally insured limits. Restricted cash balances consisted of thefollowing at December 31 (in thousands):
| ** **                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash reserved for future claim settlements and accumulated dividends |       | $        | 102        |     | $          | 101 |   |
| Cash balances of wholly owned insurance subsidiary                   |       | 3,230    |       | 3,077    |       |
|                                                                 |       | $        | 3,332      |     | $          | 3,178 |   |

 

Supplemental cash flowinformation for the years ended December 31, is as follows (in thousands):
| ** **                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash payments for income taxes                                          |       | $        | 32,031     |     | $          | 14,602 |   |
| Payments for claims resolutions from restricted cash                    |       | —   |       | 150      |       |
| Payment of preferred dividends included in continuing operations        |       | —   |       | 1,518    |       |
| Non cash transactions:                                                  |       |     |       |     |       |
| Issuance of Kaiser Common  Stock to directors                           |       | 119      |       | 78       |       |
| Issuance of Kaiser Common Stock in settlement of the ICT Spectrum claim |       | —   |       | 6,196    |       |
|                                                                         |            |          |            |          |            |  |  |

 

Use of Estimates: The preparation of financialstatements in conformity with generally accepted accounting principles in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosedamounts of contingent assets and liabilities at the date of the financialstatements, and the amounts of revenues and expenses recognized during thereporting period.  Such estimates includethose related to allowances for contract and accounts receivable, deferred taxassets and valuation allowance and other investments, assumptions used todetermine the retiree medical obligation and the remaining unresolved claims.Actual results could differ from those estimates.

Concentrations of Credit Risk: Financial instrumentswhich potentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents, certificates of deposit and accountsreceivable. The Company’s cash and cash equivalents and certificates of depositare maintained in accounts held in major U.S. banks.

Reclassifications:   Certain reclassifications have been made tothe prior period financial statements contained herein in order to conform themto the 2006 presentation.

Recent Accounting Pronouncements

InMay 2005, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and ErrorCorrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” (“SFAS No. 154”)  SFAS No. 154 addressesthe requirements for the accounting for, and reporting of, a change inaccounting principle.  This statement requires retrospective applicationto prior periods’ financial statements of changes in accounting principle,unless it is impractical to determine period-specific effects or the cumulativeeffect of the change.  We adopted SFAS No. 154 effective January 1, 2006.The adoption of SFAS No. 154 did not have a material impact on our consolidatedfinancial statements.

InJuly 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an Interpretation of FASB Statement No.109” (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income tax positions and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return, and providesguidance on derecognition, interest and penalties, accounting in the interimperiods and transition.  The provisionsof FIN 48 are effective for fiscal years beginning after December 15,2006.  The Company is currently assessingthe impact, if any, of the interpretation on its financial position or resultsof operations.

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). ThisStatement defines fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We arecurrently assessing the impact, if any, of SFAS No. 157 on our consolidatedfinancial statements.

In September 2006, theFASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pensionand Other Postretirement Plans (an amendment of FASB Statements No. 87, 88,106, and 123R)” (“SFAS No. 158”). The objectives of this Statement are for anemployer to: (1) recognize the overfunded or underfunded status of asingle-employer defined benefit postretirement plan as an asset or liability inits statement of financial position and to recognize changes in funded statusin comprehensive income in the year in which the changes occur; and (2) measurethe plan status as of the date of its year-end statement of financial position.SFAS No. 158 is effective for the requirement to recognize the funded status ofa 

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benefit plan and thedisclosure requirements as of the end of the fiscal year ending after December15, 2006. The requirement to measure plan assets and benefit obligations as ofthe date of the employer’s fiscal year-end statement of financial positionshall be effective for fiscal years ending after December 15, 2008. Theadoption of SFAS No. 158 did not have a material impact on ourconsolidated financial statements.

In September 2006, theSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No.108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”), to addressdiversity in practice in quantifying financial statement misstatements. SAB 108requires quantification of financial statement misstatements based on theeffects of the misstatements on each of the company’s financial statements andthe related financial statement disclosures. SAB 108 did not have a materialimpact on our consolidated financial statements.

4.             Contract Receivables, net

Contract receivables consist entirely of the netcarrying value of the net assets of the Nova Hut project and were as follows atDecember 31 (in thousands):

|                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Cash                                                |       | $        | —     |     | $          | 26 |   |
| Letter of credit cash collateral drawn by Nova Hut  |       | 11,100   |       | 11,100   |       |
| Retained accounts receivable                        |       | 21,634   |       | 21,404   |       |
| Subcontractor retentions and other accounts payable |       | (5,111   | )          | (5,180   | )          |
|                                                |       | 27,623   |       | 27,350   |       |
| Allowance for estimated loss                        |       | (27,623  | )          | (24,350  | )          |
|                                                |       | $        | 0          |     | $          | 3,000 |   |

 

Although OldKaiser sold its Metals Mining and Industry business unit in August 2000, itretained its Netherlands subsidiary, Kaiser Netherlands, B.V. (“KaiserNetherlands”), which had been responsible for a turnkey engineering andconstruction services contract for the construction of a steel mini-mill in theCzech Republic for Nova Hut.  Afterconstruction of the mini-mill was completed in 2000, the contract with Nova Hutprovided for a maximum of three possible performance tests. The firstperformance test was completed on November 13, 2000. Kaiser Netherlandsbelieves that the first performance test was successful and that Nova Hutshould have agreed to final acceptance of the mini-mill and made final paymentof amounts accrued by Kaiser Netherlands throughout the project, including feeand retention amounts with release of performance guarantee instruments.  Nova Hut, however, asserted that the firsttest was not successful. Kaiser Netherlands believes that such contention mayhave been put forth in response to severe financial constraints on Nova Hut’soperations resulting from weakening conditions in the worldwide steel marketand the significant amounts that Kaiser Netherlands believed it wascontractually due.

Initially, from2001 to 2005, the primary legal venue of this dispute had been the Delawarebankruptcy proceeding for Old Kaiser, where the Company has asserted claimsagainst Nova Hut and the International Finance Corporation (“IFC”).  The United States Bankruptcy Court for theDistrict of Delaware (“Bankruptcy Court”) had previously ruled that theCompany, as opposed to Kaiser Netherlands, could proceed with prosecution ofits specific claims against Nova Hut and IFC in the Bankruptcy Courtvenue.  Both Nova Hut and IFC appealedthis ruling and, during the first quarter 2004, the Bankruptcy Court’s decisionregarding the IFC was overturned by the District Court, ruling that the IFCenjoys sovereign immunity from prosecution. The Company filed an appeal with the U.S. Court of Appeals for the ThirdCircuit regarding this decision in favor of the IFC, and on February 25, 2005,the Third Circuit overturned the District Court’s decision. The IFC’s requestfor a rehearing of the case by the Third Circuit was refused.  The IFC then petitioned the Bankruptcy Courtto stay proceedings pending completion of the Kaiser Netherlands-Nova Hutarbitration proceeding discussed below. This IFC motion was granted.  With regard to the Nova Hut appeal, theDistrict Court has ruled that U.S. bankruptcy proceedings should also be stayedpending completion of a separate arbitration proceeding to be initiated by theCompany.  The Company has recently fileda motion with the Bankruptcy Court to secure discovery against Nova Hut and theIFC, pending the initiation of international arbitration proceedings by theCompany as previously ordered by the Bankruptcy Court.  These hearings have been stayed until April25, 2007.

In January 2004,the Company’s Kaiser Netherlands subsidiary filed arbitration claims againstNova Hut in the amount of $51.1 million with the International Chamber ofCommerce (“ICC”).  In November 2004,Kaiser Netherlands’ claim against Nova Hut was amended to include late interestand other charges totaling $67.5 million. Nova Hut submitted a $49.7 million counterclaim against KaiserNetherlands in the same proceedings.  Thearbitration panel was constituted, and a hearing was held in September2005.  On May 16, 2006, the Company wasinformed that the ICC arbitration panel issued a ruling that 

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was not favorableto the Company and is not appealable. After calculation of claim and counter-claim award amounts, the netbalance award against Kaiser Netherlands, including legal cost and interestamounts, is approximately $4.1 million in favor of Nova Hut (now Mittal SteelOstrava, a.s.).  The Company does notbelieve that Nova Hut has recourse to the Company to collect this net awardamount.  Nova Hut is, however, expectedto attempt to enforce the award against Kaiser Netherlands which has limitedassets.

InDecember 2003, the ICC, under the dispute resolution provisions of the Nova Hutmini-mill subcontract between Kaiser Netherlands and the mini-mill’s mainequipment supplier, Tippins, Inc., issued a final award that was on balancefavorable to Kaiser Netherlands.  As aresult of the ruling, Kaiser Netherlands was relieved of the obligation to payadditional retention to Tippins, Inc., and Kaiser Netherlands was awarded a netcash settlement of $2.6 million.  TheCompany has not recorded this award due to the uncertainties regardingcollectibility.  However, the Company iscurrently pursuing collection of this award.

Takinginto account the results of the ICC arbitration ruling against KaiserNetherlands, in the second quarter of 2006 the Company wrote off the remainingNova Hut contract receivable of $3.0 million by recording an additional reserveof $3.0 million.

5.             Business Segments and Foreign Operations

TheCompany had no reportable segments or foreign operations at any time during2006, 2005 or 2004.

6.             Investmentin and Advances to Joint Venture

The Company’s netinvestment in and advances to joint venture totaled $2.3 million and $87.3million at December 31, 2006 and 2005, respectively and consisted solely of theCompany’s investment in the Kaiser-Hill. The Company accounts for its 50% ownership in the Kaiser-Hill investmentusing the equity method.

**Summarizedfinancial information of Kaiser-Hill was as follows as of December 31 (inthousands):**

|                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |
| Current assets              |       | $        | 19,652     |     | $          | 296,203  |       | $ | 118,011 |   |
| Non-current assets          |       | —   |       | —   |       | 132,224  |       |
| Current liabilities         |       | 15,098   |       | 121,583  |       | 113,609  |       |
| Non-current liabilities     |       | —   |       | —   |       | 66,134   |       |
|                        |       |     |       |     |       |     |       |
| Gross revenue               |       | $        | 88,417     |     | $          | 701,693  |       | $ | 651,851 |   |
| Subcontracts and  materials |       | (18,086  | )          | (313,182 | )          | (377,649 | )          |
| Service revenue             |       | 70,331   |       | 388,511  |       | 274,202  |       |
| Operating  expenses         |       | (72,094  | )          | (197,117 | )          | (233,574 | )          |
| Other income (expense)      |       | 1,697    |       | 34       |       | 32       |       |
| Net  (loss) income          |       | $        | (66        | )        | $          | 191,428  |       | $ | 40,660 |   |

 

On October 13, 2005,Kaiser-Hill declared physical completion of the cleanup and closure of the DOE’sRocky Flats site.  On December 8, 2005,the DOE affirmed Kaiser-Hill’s declaration as required under the ClosureContract and the DOE authorized Kaiser-Hill to invoice all remainingperformance fees less a retained amount equaling $5.0 million.  On January 11, 2006, Kaiser-Hillreceived payment for all fees except for the retained amount. The project totalfee expected to be earned by Kaiser-Hill pursuant to the Contract is $510.9million based on Kaiser-Hill’s cost to complete the site closure of $3.44billion.  Through March 20, 2007,Kaiser-Hill has received $510.8 million of such fee from the DOE.

Kaiser-Hillrecognized a substantial amount of the fee income from the DOE upon thedeclaration of physical completion on October 13, 2005 and, accordingly, theCompany’s proportionate share of such income was recorded in Equity Income inEarnings of Joint Venture in its consolidated statement of operations for theyear ended December 31, 2005.

As noted previously,Kaiser-Hill recognized a substantial amount of fee income from the DOE upon thedeclaration of physical completion on October 13, 2005 and, accordingly, theCompany’s proportionate share of such income was recorded in Equity Income inEarnings of Joint Venture in the Company’s consolidated statement of operationsfor the year ended December 31, 2005.  Asa result, upon the receipt of the $80.0 million cash distribution fromKaiser-Hill on March 1, 2006, and the receipt of $5.0 million distributed fromKaiser-Hill on June 30, 2006, the Company has made a corresponding reduction of$85.0 million in its investment in Kaiser-Hill on its balance sheet as ofDecember 31, 2006. The Company has received an additional distribution of $1.5million from Kaiser-Hill on February 27, 2007.

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The Closure Contract provides that Kaiser-Hill will earn revenue equal tothe actual cost of physical completion plus a performance fee.  The performance is based on (1) Kaiser-Hill’scost to complete the site closure, which must be within the range of $3.1billion and $4.9 billion, (2) the schedule of physical completion, which mustbe before 2007 and (3) Kaiser-Hill’s safety performance.  At the time of declaration of physicalcompletion on October 13, 2005, Kaiser-Hill’s cost estimate to complete theproject remained at $3.44 billion, which resulted in a total performance feepayable to Kaiser-Hill projected to be $510.9 million.

Since Kaiser-Hilldeclared physical completion, many of the performance risks have beeneliminated, but contract risks and uncertainties remain. As a result ofdeclaration of physical completion in October 2005, Kaiser-Hill recognized allremaining performance fees under the Closure Contract in 2005 and hasestablished reserves for certain risks and uncertainties related to the ClosureContract.  Kaiser-Hill will reverse thesereserves to the extent it is successful in mitigating or eliminating theseremaining contract risks and uncertainties.

Underthe Closure Contract, Kaiser-Hill is not responsible for, and the DOE pays allcosts associated with any liability, including, without limitation, any claimsinvolving strict or absolute liability and any civil fine or penalty, expenseor remediation cost, but limited to those of a civil nature, which may beincurred by, imposed on, or asserted against Kaiser-Hill arising out of any actor failure to act, condition or exposure which occurred before Kaiser-Hillassumed responsibility on July 1, 1995 (“pre-existing conditions”). To theextent the acts or omissions of Kaiser-Hill constitute willful misconduct, lackof good faith, or failure to exercise prudent business judgment on the part ofKaiser-Hill’s managerial personnel and cause or add to any liability, expense,or remediation cost resulting from pre-existing conditions, Kaiser-Hill isresponsible, but only for the incremental liability, expense or remediationcaused by Kaiser-Hill.

The ClosureContract further provides that Kaiser-Hill will be reimbursed for thereasonable cost of bonds and insurance allocable to the contract and forliabilities and expenses incidental to these liabilities, including litigationcosts, to third parties not compensated by insurance or otherwise. There is anexception to this reimbursement provision applicable to liabilities caused bythe willful misconduct, lack of good faith or failure to exercise prudentbusiness judgment by Kaiser-Hill’s managerial personnel.

Kaiser-Hill nowoperates under the closeout phase of its contract with the DOE, primarilyresolving the administrative issues and providing support to the DOE to achieveregulatory closure of the site.  Thecloseout phase of the contract is a cost reimbursable phase and is not fee -bearing; the Company does not expect that the closeout phase will impact feesearned. Effective December 31, 2005,Kaiser-Hill terminated its remaining employees. Staff necessary to complete closeout activities is being subcontractedor provided by CH2M Hill Companies Ltd.

As part of theCompany’s adoption of fresh-start reporting as of December 31, 2000, theCompany increased the carrying value of the Company’s investment in Kaiser-Hillby $21.1 million, and the Company has been amortizing such increased carryingvalue over an estimated life of the Kaiser-Hill investment of approximately 6years.  The difference between theCompany’s carrying value of the investment in Kaiser-Hill and its 50%underlying equity in Kaiser-Hill’s net assets at December 31, 2004 was $7.0million and was being amortized on a straight-line basis through 2006. BecauseKaiser-Hill declared physical completion of the site on October 13, 2005,during 2005 the Company wrote off the remaining $7.0 million unamortizedbalance as a reduction to the equity income of earnings of affiliate.

With respect to a revolving credit facility obtainedby Kaiser-Hill in November 1999, both owners of Kaiser-Hill granted a firstlien security interest to the Kaiser-Hill lenders in all of the ownership andequity interest of Kaiser-Hill and have agreed to cure any events of default byKaiser-Hill on the facility.  As of December 31, 2006 and 2005 Kaiser-Hill had$0.0 million and $3.0, respectively, outstanding on its revolving credit.

7.             Investmentin Affiliates

In 1997, the Company purchased a 4% ownership interestin a limited liability company (“the LLC”) that leases the land and owns thebuildings where the Company’s corporate headquarters were located.  Effective October 28, 2000, the Companynegotiated a settlement with the otherowners of the LLC resolving various issues between the Company and the otherowners.  As a part of that resolution,the Company fixed the maximum amount of potential future recovery of theinvestment to $2.8 million at whatever time as the property is sold orrefinanced.  At December 31, 2006 and2005, the amount of the investment remains unchanged.

8.             MandatorilyRedeemable Preferred Stock

On November 17, 2005, the Company redeemed all of theremaining outstanding shares of New Preferred held by non-

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affiliates.  As aresult, at December 31, 2005, after consideration of shares in treasury of101,471, the Company had no shares of New Preferred outstanding.  In January 2006, pursuant to approval by theCompany’s Board, the treasury shares were cancelled leaving no sharesoutstanding or in treasury.  In thequarter ended March 31, 2006, the Company reduced the capital in excess of parby $2.7 million that was recorded upon issuance of the New Preferred shares toaffiliates with a corresponding increase to Retained Earnings.

TheCompany’s certificate of incorporation authorizes the issuance of 2,000,000shares of New Preferred. The New Preferred was shown at a liquidation value of$55.00 per share and is a series of authorized preferred stock designated as “Series1 Redeemable Cumulative Preferred Stock,” and had a par value of $0.01 pershare. The New Preferred ranks ahead of Kaiser Common Stock.  The certificate of incorporation of theCompany and Delaware law permit the Board of Directors to issue additionalseries of preferred stock, except that the Board of Directors may not authorizethe issuance of any securities that rank senior to or on a parity with the NewPreferred, without the consent of holders of at least two-thirds of the NewPreferred.  New Preferred was originallyissued as settlement for Class 4 claims. As mentioned in Note 2, because the Company has been settlingcertain remaining Class 4 claims entirely for cash payments in lieu of thecombination of cash and New Preferred and Kaiser Common Stock as contemplatedin the Plan of Reorganization, the Company has no plans to issue additionalshares of New Preferred.

The Company adopted SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity,” effective July 1, 2003.  Due tothe mandatorily redeemable feature of the New Preferred, the New Preferred wasreclassified from mezzanine equity to a long term liability on the consolidatedbalance sheet, and the preferred stock dividends were reclassified to interestexpense on the consolidated statement of operations effective July 1,2003.  There was no transition adjustmentrecognized upon adoption of SFAS No. 150.

Cumulative dividends, classified as interest expensesubsequent to July 1, 2003, on the New Preferred were payable on a quarterlybasis, as of April 30, July 31, October 31 and January 31, either in cash at anannual rate of 7% of the liquidation preference per share or in additionalshares of New Preferred at an annual rate of 12% of the per share liquidationpreference. Dividends accrued on the New Preferred commencing with the initialdistribution date, April 17, 2001. Dividends were not paid to any affiliate ofthe Company on account of that affiliate’s ownership of shares of preferredstock as long as there was New Preferred shares held by any non-affiliatedentities or parties. Upon the November 17, 2005 redemption of the207,431 shares of remaining outstanding New Preferred held by non-affiliates,the Company no longer has a dividend payment requirement.

Kaiser Government Programs, Inc.’s(“KGP”) Put Rights 

KGP is the Company subsidiarythat owns (through a wholly owned subsidiary of KGP) the 50% interest inKaiser-Hill Company, LLC.  KGP wassubject to outstanding put rights, expiring on December 31, 2007, that obligatedit to purchase New Preferred owned by a holder of the put right, at the holder’soption, under three circumstances:

**·**                  if KGP received net after-tax proceeds from any cash distributions fromKaiser-Hill that, on a quarterly basis, exceed 2.8 times the amount of cashrequired to pay all past accrued but unpaid cash dividends on the NewPreferred, plus the next scheduled quarterly cash dividend on New Preferred;

·                  if KGP received netafter-tax proceeds from any director indirect disposition of any interest in Kaiser-Hill; or

·                  if KGP received net after-tax proceeds from anextraordinary distribution from Kaiser-Hill.

Thoughno put rights were ever executed, the Company from time to time receiveddistributions from Kaiser-Hill that triggered the put rights — effectivelyrequiring the Company to redeem certain New Preferred.  In addition, the Company had certainrestricted cash balances available, which pursuant to the terms of its Plan ofReorganization were required to be used to redeem outstanding New Preferred.  Rather than using the mechanism of the putrights to satisfy the Company’s obligations to holders of the put rights aftera trigger, the Company observed the requirements in the Plan of Reorganizationto use certain restricted cash balances, and in the terms of the New Preferred,to use certain available cash, for preferred redemptions.  The Company believed this was a morecost-efficient manner of satisfying the obligations associated with the KGP putrights. Upon the November 17, 2005redemption of the 207,431 shares of remaining outstanding New Preferred held bynon-affiliates and the subsequent cancellation of the treasury shares, theCompany no longer has an obligation under the put rights.

 

F-14

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As of December 31, 2005, the Company had redeemed allof the outstanding shares of New Preferred as follows (in thousands exceptshare amounts):
| **Date of Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Restricted  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
|                             |       |                                |       |                              |       |                                  |       |                                 |       |
| November 2005                    |       | $                                   | 11,409     |                              | $          | —                                |       | $                                    | 11,409     |   | 207,431 |   |
| September 2005                   |       | 4,715                               |       | 785                               |       | 5,500                                 |       | 100,000                              |       |
| April 2005                       |       | 10,000                              |       | —                            |       | 10,000                                |       | 181,818                              |       |
| July 2004                        |       | 2,478                               |       | 512                               |       | 2,990                                 |       | 54,361                               |       |
| February 2004                    |       | 2,599                               |       | 2,677                             |       | 5,276                                 |       | 95,932                               |       |
|                                  |            |                                     |            |                                   |            |                                       |            |                                      |            |  |  |  |

 

9.             Common Stock

The Company certificate of incorporation authorizes theissuance of 3,000,000 shares of Kaiser Common Stock.  Pursuant to the Plan of Reorganization,holders of allowed Class 4 claims and allowed Class 5 claims are to receiveshares of Kaiser Common Stock under the Plan of Reorganization.

In connection with its initial distribution out ofbankruptcy on or about April 17, 2001, the Company issued to holders of allowedClass 4 claims one share of Kaiser Common Stock for each $100.00 of such holder’srespective allowed Class 4 claim. Subsequent to April 17, 2001, 823 shares of Kaiser Common Stock havebeen issued related to the settlement of claims.

In the initial distribution holders of allowed Class 5claims received their pro rata portion of Kaiser Common Stock representing 15%of the aggregate amount of Kaiser Common Stock to be outstanding followingdistributions to holders of allowed Class 4 claims and allowed Class 5 claims.This outcome was accomplished by issuing to each holder of an allowed Class 5claim its pro rata portion of the number of shares of Kaiser Common Stock thatrepresents 17.65% of the total number of shares of Kaiser Common Stock issuedfrom time to time to holders of allowed Class 4 claims.

The Company declared a $6.00 percommon share cash dividend on December 21, 2006 payable to shareholders ofrecord on January 2, 2007. The dividend was paid on January 16, 2007.  Any future determination to pay cashdividends will be at the discretion of our Board which determines our dividendpolicy based on our results of operations, capital requirements, and otherfactors that our Board deems relevant.

ICT Spectrum settlement:  Theformer shareholders of ICT Spectrum are holders of equity interests under thePlan of Reorganization.  OnOctober 19, 2005, the Company entered into a settlement agreement with therepresentatives of the former shareholders of ICT Spectrum, who had claimed tobe entitled to additional shares of Kaiser Common Stock, to settle all of theiroutstanding claims against the Company. On December 6, 2005, the Bankruptcy Court granted final approval of theproposed settlement agreement.  As aresult, the Company issued and distributed 175,003 shares of Kaiser CommonStock to the former shareholders of ICT Spectrum in December 2005.

Because an agreement was reached with the formershareholders of ICT Spectrum, at September 30, 2005, the Company recorded a$6.2 million reserve on its balance sheet to account for this non-cashtransaction.  The amount of the reservewas based on the number of Kaiser Common Stock shares to be issued and themarket value of the Kaiser Common Stock shares on October 19, 2005, reduced forthe estimated dilutive effect of the issuance of the additional Kaiser CommonStock shares.  The Kaiser Common Stockshares were charged against this reserve when the shares were issued inDecember 2005.

Share reconciliation: Since 2001, the Company has been attempting to reconcile the number ofshares that were issued by the Company’s transfer agent in the initialdistribution in 2001.  Prior to 2005, theCompany had not recognized the issuance of 11,599 shares of Kaiser Common Stockby the transfer agent.  Because theCompany was unsuccessful in disputing the issuance of these shares, during 2005the Company retroactively restated the number outstanding shares to reflect theissuance of the 11,599 shares as of June 2001.

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10.           Leases

The Company has the followingfuture commitments on material noncancelable operating leases with initial orremaining terms in excess of one year at December 31, 2006:

| Year ending December 31: | ** ** | **Amount  (dollars in thousands)** | ** ** |
|-----------------------------------------|------------|----------------------------------------------|------------|
| 2007                                    |       | $                                            | 24         |   |
|                                    |       | $                                            | 24         |   |

 

The total rental expense for all operating leases was$116,000 and $110,000 during the years ended December 31, 2006 and 2005,respectively.

11.           IncomeTaxes

The components of net income used to compute the expensefor income taxes for the years ended December 31 were as follows (inthousands):

|                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Benefit (expense) for income taxes: |       |     |       |     |       |     |       |
| Federal:                            |       |     |       |     |       |     |       |
| Current                             |       | $        | 8,942      |     | $          | (41,204  | )          | $ | (2,941 | ) |
| Deferred                            |       | (5,753   | )          | 12,957   |       | 1,492    |       |
|                                |       | 3,189    |       | (28,247  | )          | (1,449   | )          |
| State:                              |       |     |       |     |       |     |       |
| Current                             |       | —   |       | (5,715   | )          | (462     | )          |
| Deferred                            |       | 441      |       | 1,797    |       | 176      |       |
|                                |       | 441      |       | (3,918   | )          | (286     | )          |
|                                |       |     |       |     |       |     |       |
|                                |       | $        | 3,630      |     | $          | (32,165  | )          | $ | (1,735 | ) |

 

The effective income tax expensevaried from the federal statutory income tax expense because of the followingdifferences (in thousands):

|                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                 |       |     |       |     |       |     |       |
| Income tax  benefit (expense) computed at federal statutory tax rate |       | $        | 2,099      |     | $          | (27,110  | )          | $ | (3,189 | ) |
|                                                                 |       |     |       |     |       |     |       |
| Change in tax  (expense) benefit from:                               |       |     |       |     |       |     |       |
| State income  taxes                                                  |       | 230      |       | (2,554   | )          | (343     | )          |
| Settlement of  ICT Spectrum claim                                    |       | —   |       | (2,169   | )          | —   |       |
| Tax free  municipal interest                                         |       | 611      |       | 48       |       | —   |       |
| Business meals  and entertainment                                    |       | (18      | )          | (32      | )          | (33      | )          |
| Restructuring  costs                                                 |       | —   |       | —   |       | (1       | )          |
| Penalties and  fines                                                 |       | (2       | )          | —   |       | (4       | )          |
| Lobbying costs                                                       |       | (13      | )          | (17      | )          | (15      | )          |
| Reversals and  other                                                 |       | (638     | )          | 91       |       | 259      |       |
| Subsidiary and  joint venture adjustments                            |       | 1361     |       | —   |       | 2,310    |       |
| Preferred  Dividend                                                  |       | —   |       | (422     | )          | (719     | )          |
|                                                                 |       | 1,531    |       | (5,053   | )          | 1,454    | )          |
|                                                                 |       | $        | 3,630      |     | $          | (32,165  | )          | $ | (1,735 | ) |

 

The tax effects of the principaltemporary differences and carryforwards that give rise to the Company’s netdeferred tax asset (liability) are as follows (in thousands):

|                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| Reserves for  estimated losses on contract receivable |       | $        | —     |     | $          | 5,035 |   |
| Reserves for  retiree benefit plans                   |       | 2,458    |       | 2,631    |       |
| Reserves for  adjustments and allowances              |       | 187      |       | 241      |       |
| Investment in  Kaiser-Hill                            |       | 1,699    |       | 1,856    |       |
| Write-down of  other investments                      |       | (1,904   | )          | (1,904   | )          |
| Other                                                 |       | 469      |       | 356      |       |
|                                                  |       | $        | 2,909      |     | $          | 8,215 |   |

 

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The ability to derivefuture benefit from some of the elements contributing to the net deferred taxasset at December 31, 2006 is dependent on the Company’s ability to generatesufficient taxable income prior to expiration. The Company believes that the results of its future operations will besufficient to assure utilization of the tax benefits prior to expiration.

12.             Retiree Benefit Plans

Post Employment Benefit Plan: As of December 31, 2006,the Company is required to continue to fulfill the provisions of a previouslycurtailed plan which provides certain medical and death benefits to a group ofretirees. All of the benefit is fully covered by the Company’s self-insurance.In respect to the retirees covered by the medical and death benefitself-insured plan, the benefits are funded to a claims administrator asparticipants’ insurance claims are reimbursed.

Because there are no newparticipants in this plan, there is no current service cost. The change in thestatus of the plan as of December 31 was as follows (in thousands):

|                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Benefit obligation at January 1,        |       | $        | 6,924      |     | $          | 6,623 |   |
| Service cost                            |       | —   |       | —   |       |
| Interest cost                           |       | 420      |       | 480      |       |
| Administrative costs reserve            |       | —   |       | 700      |       |
| Benefits paid                           |       | (1,306   | )          | (1,365   | )          |
| Actuarial (gain) loss                   |       | 430      |       | 122      |       |
| Benefit obligation at December 31,      |       | 6,468    |       | 6,560    |       |
| Unrecognized net gain (loss)            |       | —   |       | 364      |       |
| Net  benefit obligation at December 31, |       | $        | 6,468      |     | $          | 6,924 |   |

 

The net periodic postretirement benefit cost consists ofthe following:

|                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Funded status:                            |       |     |       |     |       |     |       |
| Service cost                              |       | —   |       | —   |       | —   |       |
| Interest cost                             |       | 420      |       | 480      |       | 480      |       |
| Amortization of prior service  costs      |       | —   |       | —   |       | —   |       |
| Amortization of net (gain)  loss          |       | 36       |       | (81      | )          | (189     | )          |
| Net  periodic postretirement benefit cost |       | $        | 456        |     | $          | 399      |       | $ | 291 |   |
|                                           |            |          |            |          |            |          |            |  |  |  |

 

At December 31, 2006, theestimated future net benefit payments to be paid out in the next ten years areas follows (in thousands):

| 2007         |   | $    | 864    |   |
|--------------|--------|------|--------|--------|
| 2008         |   | 777  |   |
| 2009         |   | 680  |   |
| 2010         |   | 591  |   |
| 2011         |   | 512  |   |
| 2012  - 2016 |   | 1663 |   |

 

The discount rate used in determining the expense was6.0% for 2006, 2005 and 2004.  Pursuantto the terms of the plan obligations, changes in medical cost trend rates haveno financial impact on the actuarial valuation as the cost of the benefit tothe participant has exceeded the Company’s commitment.

Since the December2000 approval of the reorganization plan, the Company has been negotiating withthe Bankruptcy Court-appointed Official Committee of Retirees (“OCR”) to designand implement a benefits funding plan that would provide for all retireebenefit obligations going forward.   Asof March 20, 2007, the agreement has not yet been implemented.

In an adversaryclaim hearing in the Bankruptcy Court held on April 12, 2006, the Courtaccepted the Company’s proposal to establish a Voluntary Employees’ BeneficiaryAssociation (“VEBA”) to fund retirees’ future medical and death benefits in thepresent value amount of approximately $6.1 million.  The present value pension obligation of $0.3million will continue to be funded directly by the Company.  As of December 31, 2006, the Company had anaccrued liability of $6.5 million.  Legaland administrative arrangements for establishment of the VEBA are in theprocess of final documentation.

Furthermore,according to the terms of the Bankruptcy Court decision, after the VEBA hasbeen in place for five years, the Company will be required to undertake anactuarial analysis of the projected net present value of benefits remaining tobe paid out.  If the remaining VEBA fundamount is then not sufficient to pay the estimated present value of futurebenefits obligations, then the Company will be required to contribute theestimated shortfall amount to the VEBA fund. It is not possible to predict at this time whether a shortfall in theVEBA fund would exist after a period of five years and, if so, what the Company’scontribution requirement for a shortfall amount would be in this circumstance.

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13.            Benefits and Compensation Plans

TheCompany sponsors a 401(k) Plan that allows employees to defer portions of theirsalary, subject to certain limitations. Total expense for this plan for theyears ended December 31, 2006, 2005 and 2004 was $0, $27,000, and $14,000,respectively.

14.           Related PartyTransactions

AtDecember 31, 2006 and 2005, the Company had an outstanding receivable fromKaiser-Hill totaling $0 and $87,500, respectively, consisting of billings forcontracted services.

At December 31, 2006 and 2005, the Company hasinvested funds in certificates of deposit at a financial institution where oneof the Company’s directors serves on the board. The certificates of deposits and other cash deposits total $1.1 millionand $3.0 million at December 31, 2006 and 2005, respectively.  The certificates of deposit bear a marketrate of interest.

15.           OtherContingencies

The Company has variousobligations and liabilities from its continuing operations, including generaloverhead expenses in connection with maintaining, operating and winding downthe various entities and net assets comprising the Company.  Additionally, the Company believes contingentliabilities may exist in the following areas:

Nova Hut

On May 16, 2006,the Company was informed that an arbitration panel formed under the auspices ofthe International Chamber of Commerce (“ICC”) issued a ruling in thearbitration proceeding initiated by its subsidiary, Kaiser Netherlands B.V. (“KaiserNetherlands”) concerning the steel mini-mill that was constructed by KaiserNetherlands for Nova Hut, a.s. (now Mittal Steel Ostrava, a.s.) (“Nova Hut”) inOstrava, the Czech Republic.  Thedecision by the arbitration panel is not appealable.  After calculation of claim and counter-claimaward amounts as decided by the ICC arbitration panel, the net balance awardagainst Kaiser Netherlands, including legal cost and interest amounts, isapproximately $4.1 million in favor of Nova Hut.  The Company does not believe that Nova Huthas recourse to the Company to collect this award amount.  Nova Hut is, however, expected to attempt toenforce the award against Kaiser Netherlands which has limited assets.

The Companycontinues to evaluate its remaining options against Nova Hut and the InternationalFinance Corporation (“IFC”).  Among theoptions being considered are the filing of independent arbitration claims bythe Company (as opposed to Kaiser Netherlands) against Nova Hut and the IFC inaccordance with prior rulings of the Bankruptcy Court.  The Bankruptcy Court has entered an orderstaying the Company’s claim against the IFC pending submission of the disputeto arbitration.  Similarly, theBankruptcy Court has entered an order staying the Company’s bankruptcy claimagainst Nova Hut pending arbitration. The Company has recently filed a motion with the Bankruptcy Court tosecure discovery against Nova Hut and the IFC, pending the initiation ofinternational arbitration proceedings by the Company as previously ordered bythe Bankruptcy Court.  These hearingshave been stayed until April 25, 2007.

In December 2003,an ICC arbitration panel, under the dispute resolution provisions of the NovaHut mini-mill subcontract between Kaiser Netherlands and the min-mill’s mainequipment supplier, Tippins, Inc., issued a final award that was on balancefavorable to Kaiser Netherlands.  As aresult of the ruling, Kaiser Netherlands was relieved of the obligation to payretention to Tippins, and Kaiser Netherlands was awarded a net cash settlementof $2.6 million.  The Company has notrecorded this award due to the uncertainties regarding collectibility.  However, the Company is actively pursuingcollection of this award.

The continuedlitigation of these disputes has had, and will continue to have, a negativeimpact on the cash flow of the Company.

Taking intoaccount the results of the ICC arbitration ruling against Kaiser Netherlands,in the second quarter of 2006 the Company wrote off the remaining Nova Hutcontract receivable of $3.0 million by recording an additional reserve of $3.0million.

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Kaiser-Hill

On October 13,2005, Kaiser-Hill declared physical completion of the cleanup and closure ofthe DOE’s Rocky Flats site.  DOE hasreviewed Kaiser-Hill’s declaration as required under the Closure Contract. OnDecember 8, 2005, the DOE accepted the physical completion declaration inaccordance with the Closure Contract. The projected total fee to be earnedpursuant to the Closure Contract is expected to be $510.9 million based onKaiser-Hill’s cost to complete the site closure of $3.44 billion.  As of March 20, 2007, Kaiser-Hill hasreceived $510.8 million of such fee from the DOE.  A substantial portion of the received feeremains subject to audit.

UnderKaiser-Hill’s contract with the DOE, Kaiser-Hill is not responsible for, andthe DOE pays all costs associated with, any liability, including, withoutlimitation, any claims involving strict or absolute liability and any civilfine or penalty, expense, or remediation cost, but limited to those of a civilnature, which may be incurred by, imposed on, or asserted against Kaiser-Hillarising out of any act or failure to act, condition, or exposure which occurredbefore Kaiser-Hill assumed responsibility on July 1, 1995 (pre-existingconditions). To the extent the acts or omissions of Kaiser-Hill constitutewillful misconduct, lack of good faith, or failure to exercise prudent businessjudgment on the part of Kaiser-Hill managerial personnel and cause or add toany liability, expense, or remediation cost resulting from pre-existingconditions, Kaiser-Hill is responsible, but only for the incremental liability,expense, or remediation caused by Kaiser-Hill.

TheClosure Contract further provides that Kaiser-Hill will be reimbursed for thereasonable cost of bonds and insurance allocable to the Rocky Flats contractand for liabilities and expenses incidental to these liabilities, includinglitigation costs, to third parties not compensated by insurance or otherwise.There is an exception to this reimbursement provision applicable to liabilitiescaused by the willful misconduct, lack of good faith or failure to exerciseprudent business judgment by Kaiser-Hill managerial personnel.

Asthe contract between Kaiser-Hill and the DOE is cost-reimbursable in nature,the costs invoiced by Kaiser-Hill for reimbursement by the DOE are subject toaudit by the U.S. government.  Also sincethe inception of Kaiser-Hill, the Company invoiced certain management oversightcosts to Kaiser-Hill.  Government auditsat Kaiser-Hill are ongoing.  AlthoughKaiser-Hill and the Company have historically provided for their estimates ofdisallowed costs on cost-reimbursable contracts, uncertainties exist withregard to whether government audits will result in any disallowed costs needingto be refunded to the government customer. The continued adequacy of provisions for reserves with regard tounallowable costs is reviewed regularly.

Kaiser-Hillnow operates under the closeout phase of the DOE Rocky Flats Closure Contract,primarily resolving open administrative issues and providing support to the DOEto achieve regulatory closure of the site. The closeout phase of the contract is a cost reimbursable phase and isnot fee - bearing; the Company does not expect that the closeout phase impactfees earned.

On December 8,2005, when the DOE accepted physical completion in accordance with the RockyFlats contract, it authorized Kaiser-Hill to invoice all remaining performancefees less a retained amount equaling $5.0 million which was retained by the DOEfor possible contract contingencies.  OnJanuary 11, 2006, Kaiser-Hill received payment for all fees except for theretained amount.  As a result of thispayment, on March 1, 2006, the Company received an $80.0 million cashdistribution (representing its 50% share) from Kaiser-Hill.  On April 14, 2006, $4.9 million of theremaining $5.0 million retention was released to Kaiser-Hill by the DOE.  It cannot be determined at this time whatportion of the remaining $0.1 million DOE retention balance will ultimately bereleased and when (if ever) such a release would occur.  On June 30, 2006, the Company received anadditional $5.0 million cash distribution from Kaiser-Hill.  And, on February 27, 2007, the Companyreceived another cash distribution from Kaiser-Hill in the amount of $1.5million.

Kaiser-Hillis continuing its internal review and reconciliation of contract financial andadministrative closeout issues.  As ofMarch 20 2007, Kaiser-Hill has withheld approximately $3.6 million fromdistribution until these closeout issues are resolved.  The Company expects to receive its 50% shareof any distribution of such funds by Kaiser-Hill.

Itis expected that the Company will be required to fund its 50% share of a yet tobe determined accounting reserve in Kaiser-Hill to provision against potentialrisks associated with U.S. Government audits. At this time, it is not possible to predict the number of years thatwill be required to complete the government audit process.

Post-Retirement BenefitPlan Obligation 

In accordance withthe terms and provisions of the Plan of Reorganization for Old Kaiser, theCompany remains obligated to continue to fulfill the provisions of Old Kaiser’spreviously curtailed benefits plan, which provides certain medical and death 

F-19

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benefits to agroup of retirees.  All of the benefitderived from the plan is fully covered by the Company’s self-insurance.  With respect to the retirees covered by themedical and death self-insured plan, the benefits are funded to a claimsadministrator as participants’ insurance claims are reimbursed.

No newparticipants can be added to the plan. The net present value benefit obligation as of December 31, 2006, was$6.5 million.  This amount will continueto decrease as the population of covered participants declines for the purposesof medical benefits and as death benefits are paid out.

Since the December2000 approval of the reorganization plan, the Company has been negotiating withthe Bankruptcy Court-appointed Official Committee of Retirees (“OCR”) to designand implement a benefits funding plan that would provide for all retireebenefit obligations going forward.   Inan adversary claim hearing in the Bankruptcy Court held on April 12, 2006, theCourt accepted the Company’s proposal to establish a Voluntary Employees’Beneficiary Association (“VEBA”) to fund retirees’ future medical and deathbenefits in the present value amount of approximately $6.1 million.  The present value pension obligation of $0.3million will continue to be funded directly by the Company.  As of December 31, 2006, the Company had anaccrued liability of $6.5 million.  Legaland administrative arrangements for establishment of the VEBA are in theprocess of final documentation.

Furthermore,according to the terms of the Bankruptcy Court decision, after the VEBA hasbeen in place for five years, the Company will be required to undertake anactuarial analysis of the projected net present value of benefits remaining tobe paid out.  If the remaining VEBA fundamount is then not sufficient to pay the estimated present value of futurebenefits obligations, then the Company will be required to contribute theestimated shortfall amount to the VEBA fund. It is not possible to predict at this time whether a shortfall in theVEBA fund would exist after a period of five years and, if so, what the Company’scontribution requirement for a shortfall amount would be in this circumstance.

16.           Selected QuarterlyFinancial Information (Unaudited)

                                Forthe year ended December 31, 2006:
| ** **                                           | ** ** | **Fourth Quarter** | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Revenues                                             |       | $                       | —     |                   | $          | —                  |       | $                      | 119        |   | $ | 103 |   |
| Operating (Loss)  Income                             |       | (1,322                  | )          | (656                   | )          | (4,363                  | )          | (1,539                 | )          |
| (Loss) before income tax                             |       | (770                    | )          | (92                    | )          | (3,826                  | )          | (1,310                 | )          |
| Net income  (Loss)                                   |       | 210                     |       | 140                    |       | (2,181                  | )          | (537                   | )          |
|                                                 | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Basic and  Diluted Earnings (Loss) Per Common Share: | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Net Earnings (Loss) Per Common Share                 |       | $                       | 0.12       |                   | $          | 0.08                    |       | $                      | (1.22      | ) | $ | (0.30 | ) |
|                                                 | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Dividends declared per  share                        |       | $                       | 6.00       |                   | $          | —                  |       | $                      | —     |   | $ | — |   |

 

                                Forthe year ended December 31, 2005:
| ** **                                    | ** ** | **Fourth Quarter** | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Revenues                                      |       | $                       | 262        |                   | $          | 528                     |       | $                      | 497        |   | $ | 520 |   |
| Operating (Loss)  Income                      |       | (2,057                  | )          | (6,986                 | )          | (1,236                  | )          | (984                   | )          |
| Income before income tax                      |       | 7,434                   |       | 64,342                 |       | 2,713                   |       | 2,968                  |       |
| Net income                                    |       | 4,672                   |       | 37,506                 |       | 1,464                   |       | 1,650                  |       |
|                                          | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Basic and  Diluted Earnings Per Common Share: | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Net Earnings Per Common Share                 |       | $                       | 2.82       |                   | $          | 23.25                   |       | $                      | 0.91       |   | $ | 1.02 |   |
|                                          | ** ** | ** **              | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** |
| Dividends declared per  share                 |       | $                       | —     |                   | $          | —                  |       | $                      | —     |   | $ | — |   |

 

F-20

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**KAISER-HILLCOMPANY, LLCAND SUBSIDIARY**

ConsolidatedFinancial Statements

December 31, 2006and 2005

(With IndependentAuditors’ Report Thereon)

F-21

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**IndependentAuditors’ Report**

The MembersKaiser-Hill Company, LLC:

We have audited the accompanying consolidated balance sheets of Kaiser-HillCompany, LLC and subsidiary (the Company) as of December 31, 2006 and2005, and the related consolidated statements of operations, members’ equity,and cash flows for each of the years in the three-year period endedDecember 31, 2006. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of Kaiser-HillCompany, LLC and subsidiary as of December 31, 2006 and 2005, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America.

**/s/KPMGLLP**

February 15, 2007

 

F-22

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Consolidated Balance Sheets

December 31, 2006 and 2005

(Dollarsin thousands)
| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                       |       |     |       |     |       |
| Cash and cash  equivalents                       |       | $        | 7,898      |     | $          | 3,728 |   |
| Unbilled contract  receivables                   |       | 10,671   |       | 41,073   |       |
| Billed contract receivable                       |       | 349      |       | 250,211  |       |
| Receivable from Members                          |       | 659      |       | 733      |       |
| Prepaid expenses and  other assets               |       | 75       |       | 458      |       |
| Total assets                                     |       | 19,652   |       | 296,203  |       |
| ** **                                       |       |     |       |     |       |
| **Liabilities and Members’ Equity**         |       |     |       |     |       |
| Accounts payable and  payables to subcontractors |       | $        | 15,006     |     | $          | 45,688 |   |
| Borrowings under credit  facility                |       | —   |       | 3,000    |       |
| Accrued employee  incentive compensation         |       | —   |       | 68,469   |       |
| Accrued salaries and  employee benefits          |       | —   |       | 4,050    |       |
| Payable to Members                               |       | 92       |       | 376      |       |
| Total  liabilities                               |       | 15,098   |       | 121,583  |       |
|                                             |       |     |       |     |       |
| Contingencies (note 7)                           |       |     |       |     |       |
|                                             |       |     |       |     |       |
| Members’ equity                             |       | 4,554    |       | 174,620  |       |
|                                             |       | $        | 19,652     |     | $          | 296,203 |   |

 

See accompanying notes to consolidated financial statements.

F-23

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Consolidated Statements ofOperations

Years ended December 31, 2006, 2005, and 2004

(Dollars in thousands)
| ** **                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Gross revenue                                  |       | $        | 88,417     |     | $          | 701,693  |       | $ | 651,851 |   |
| Subcontractor  costs and direct material costs |       | (18,086  | )          | (313,182 | )          | (377,649 | )          |
| Service revenue                                |       | 70,331   |       | 388,511  |       | 274,202  |       |
| Direct cost of  service and overhead           |       | (72,094  | )          | (197,117 | )          | (233,574 | )          |
| Operating (loss) income                        |       | (1,763   | )          | 191,394  |       | 40,628   |       |
| Other income  (expense):                       |       |     |       |     |       |     |       |
| Interest income                                |       | 1,725    |       | 309      |       | 132      |       |
| Interest expense                               |       | (28      | )          | (275     | )          | (100     | )          |
| Net (loss)  income                             |       | $        | (66        | )        | $          | 191,428  |       | $ | 40,660 |   |

 

Seeaccompanying notes to consolidated financial statements.

F-24

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Consolidated Statements ofMembers’ Equity

Years ended December 31, 2006, 2005, and 2004

(Dollars in thousands)
| ** **                               | ** ** | ** **              | ** ** | **CH2M HILL** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------|------------|--------------------|------------|------------|------------|
| ** **                               | ** ** | **Kaiser KH**      | ** ** | **Constructors,**  | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Holdings, Inc.** | ** ** | **Inc.**           | ** ** | **Total**  | ** ** |
| Members’ equity,  December 31, 2003 |       | $                       | 32,416     |               | $          | 32,416     |       | $ | 64,832 |   |
|                                     |       |                    |       |               |       |       |       |
| Net income                               |       | 20,330                  |       | 20,330             |       | 40,660     |       |
| Distributions                            |       | (17,500                 | )          | (17,500            | )          | (35,000    | )          |
|                                     |       |                    |       |               |       |       |       |
| Members’ equity,  December 31, 2004 |       | 35,246                  |       | 35,246             |       | 70,492     |       |
|                                     |       |                    |       |               |       |       |       |
| Net income                               |       | 95,714                  |       | 95,714             |       | 191,428    |       |
| Distributions                            |       | (43,650                 | )          | (43,650            | )          | (87,300    | )          |
|                                     |       |                    |       |               |       |       |       |
| Members’ equity,  December 31, 2005 |       | 87,310                  |       | 87,310             |       | 174,620    |       |
|                                     |       |                    |       |               |       |       |       |
| Net loss                                 |       | (33                     | )          | (33                | )          | (66        | )          |
| Distributions                            |       | (85,000                 | )          | (85,000            | )          | (170,000   | )          |
|                                     |       |                    |       |               |       |       |       |
| Members’ equity,  December 31, 2006 |       | $                       | 2,277      |               | $          | 2,277      |       | $ | 4,554 |   |

 

Seeaccompanying notes to consolidated financial statements.

F-25

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Consolidated Statements ofCash Flows

Years ended December 31, 2006, 2005, and 2004

(Dollars in thousands)
| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                             |       |     |       |     |       |     |       |
| Net (loss) income                                                                  |       | $        | (66        | )        | $          | 191,428  |       | $ | 40,660 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |     |       |     |       |     |       |
| Amortization of deferred financing costs                                           |       | —   |       | 80       |       | 88       |       |
| Changes in assets and liabilities:                                                 |       |     |       |     |       |     |       |
| Decrease (Increase) in contract receivables                                        |       | 280,264  |       | (58,189  | )          | (19,358  | )          |
| Decrease (increase) in receivable from Members                                     |       | 74       |       | 750      |       | (917     | )          |
| Decrease (increase) in due from employees                                          |       | —   |       | 3        |       | (3       | )          |
| Decrease in prepaid expenses and other Assets                                      |       | 383      |       | 376      |       | 397      |       |
| (Decrease) increase in accounts payable and payables  to subcontractors            |       | (30,682  | )          | (37,979  | )          | 2,469    |       |
| (Decrease) increase in accrued employee incentive  compensation                    |       | (68,469  | )          | (8,696   | )          | 9,351    |       |
| Decrease in other accrued expenses                                                 |       | (4,050   | )          | (12,297  | )          | (1,010   | )          |
| (Decrease) increase in payable to Members                                          |       | (284     | )          | (2,188   | )          | 1,350    |       |
| Net cash provided by operating activities                                          |       | 177,170  |       | 73,288   |       | 33,027   |       |
|                                                                               |       |     |       |     |       |     |       |
| Cash flows from  financing activities:                                             |       |     |       |     |       |     |       |
| Distributions to Members                                                           |       | (170,000 | )          | (87,300  | )          | (35,000  | )          |
| Proceeds from credit facility                                                      |       | —   |       | 201,000  |       | 81,100   |       |
| Payments on credit facility                                                        |       | (3,000   | )          | (198,000 | )          | (81,100  | )          |
| Net cash used in financing activities                                              |       | (173,000 | )          | (84,300  | )          | (35,000  | )          |
| Net increase (decrease) in cash and cash equivalents                               |       | 4,170    |       | (11,012  | )          | (1,973   | )          |
|                                                                               |       |     |       |     |       |     |       |
| Cash and cash  equivalents, beginning of year                                      |       | 3,728    |       | 14,740   |       | 16,713   |       |
| Cash and cash  equivalents, end of year                                            |       | $        | 7,898      |     | $          | 3,728    |       | $ | 14,740 |   |
|                                                                               |       |     |       |     |       |     |       |
| Supplemental  cash flow information:                                               |       |     |       |     |       |     |       |
| Cash paid for  interest                                                            |       | $        | 28         |     | $          | 195      |       | $ | 12 |   |

 

Seeaccompanying notes to consolidated financial statements.

F-26

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Notes toConsolidated Financial Statements

December 31, 2006and 2005

**(1)     Organization**

Kaiser-HillCompany, LLC and subsidiary (the Company) was formed on October 24,1994. The principal business of the Company is to procure, execute, deliver,and perform under a contract with the Department of Energy (DOE) to manage theprograms and facilities at Rocky Flats Environmental Technology Site (RFETS) inGolden, Colorado. The mission of the RFETS is directed toward cleanup,deactivation, and preparation for decontamination and disposition of these DOEfacilities.

The Company is a limitedliability company owned equally by Kaiser KH Holdings, Inc., a wholly ownedsubsidiary of Kaiser Group Holdings, Inc. (formerly known as Kaiser GroupInternational, Inc.) (Kaiser), and CH2M HILL Constructors, Inc., a wholly ownedsubsidiary of CH2M HILL Companies, Ltd. (CH2M HILL) (collectivelythe Members). Net profits and/or losses and distributions thereof areallocated equally to the Members.

On January 24, 2000,the Company and the DOE entered into a new contract (the Contract)effective February 1, 2000 for the Rocky Flats Closure Project including,disposal of nuclear material, demolition of facilities, environmental remediation,disposal of waste, and completion of infrastructure and other general siteoperations.

On October 13, 2005,the Company completed the required work under the contract and issued itsformal “declaration of Physical Completion” to the DOE. On December 8,2005, the DOE issued its formal “acceptance” of the physical work at theproject and authorized the Company to invoice all remaining performance feesless a retained amount equaling $5 million. On January 11, 2006, theCompany received payment for all fees except for the retained amount. InApril 2006, the Company invoiced and collected $4.9 million of the$5 million previously retained. $100,000 will be retained untilsatisfactory resolution of all Defense Contractor Auditing Agency audits.

The Company now operatesunder the closeout phase of its contract with the DOE, primarily resolving openadministrative issues and providing support to the DOE to achieve regulatoryclosure of the site. The work performed under the closeout phase is performedand invoiced at cost with no markup or fee associated with the costs incurred.

EffectiveDecember 31, 2005, the Company terminated its remaining employees. Staffnecessary to complete closeout activities will be subcontracted or provided byaffiliates of its parent companies.

**(2)     Significant Accounting Policies**

***(a)     Principles of Consolidation***

The consolidatedfinancial statements include the Company and its wholly owned subsidiary,Kaiser-Hill Funding Company, LLC. All intercompany accounts andtransactions have been eliminated in the consolidated financial statements.Certain prior year balances have been reclassified to conform to the currentyear presentation.

F-27

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Notes toConsolidated Financial Statements

December 31, 2006 and2005

 

***(b)     Revenue Recognition***

Under theContract, revenue is recognized using the percentage-of-completionmethod whereby revenue is accrued in an amount equal to cost plus management’sbest estimate of incentive fees. During 2005, resulting from completion of theproject, the Company recognized all remaining performance fees under thecontract and has established reserves for certain risks and uncertaintiesassociated with the Contract. In 2006, revenue was recognized as costs wereincurred. No markup or fee was recognized or associated with the costsincurred.

***(c)     Statements of Cash Flows***

For purposes of theconsolidated statements of cash flows, the Company considers cash and short-terminvestments with original maturities of three months or less to be cash andcash equivalents.

The Company maintains itscash accounts primarily with banks located in Colorado, New York, andWashington, D.C. Cash balances are insured by the FDIC up to $100,000 per bank,and cash equivalents are not insured by the FDIC. As of December 31, 2006,the majority of the balance was comprised of cash equivalents.

***(d)     Income Taxes***

No provision for thepayment of income taxes has been made in the accompanying consolidatedfinancial statements related to the activities of the Company since the Memberseach report their share of the Company’s taxable income in their respectiveincome tax return.

***(e)     Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of financialstatements and the reported amounts of revenue and expenses during thereporting period. Actual results could differ from those estimates.

**(3)     Related-Party Transactions**

In 2006 and 2005, theMembers were subcontracted by the Company to perform certain tasks under theContract. The Payable to Members in the accompanying consolidated balancesheets as of December 31, 2006 and 2005 consists of $0 and $87,500,respectively, to Kaiser and $92,200 and $288,600, respectively, to CH2M HILLfor these subcontracted tasks. These payables are noninterest bearing.

As of December 31,2006, the Company had a receivable due from CH2M HILL for $659,000 primarilyrelating to final transition of the Rocky Flats Benefits Programs to CH2M HILLHanford Group and work performed for CH2M HILL — Washington Group Idaho, LLC.

F-28

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Notes toConsolidated Financial Statements

December 31, 2006and 2005

 

During 2003, CH2M HILLbegan providing information technology services and general support services tothe Company at negotiated rates. Costs incurred related to work performed byCH2M HILL, the majority of which are reimbursable and billed under the Contractand relate to information technology services provided, were approximately$8,500,000 in 2006, $9,751,000 in 2005, and $10,869,000 in 2004.

In addition, the Companyperformed approximately $30,000 and $3,597,000 of services on behalf of CH2MHILL during 2006 and 2005, respectively.

**(4)     Contract Receivables**

Contract receivables asof December 31, 2006 represent both billed and unbilled receivables dueunder the Contract. As of December 31, 2006 and 2005, the Company has$0.3 million and $250.2 million, respectively, of billed receivablesdue from the DOE. In addition, the Company has current unbilled receivables of approximately$10 million and $41 million as of December 31, 2006 and 2005,respectively.

Unbilled receivablesresult from revenue and estimated fees that have been earned by the Company butnot billed to the DOE as of the end of the period. Unbilled receivables can beinvoiced at contractually defined intervals and milestones. Unbilledreceivables primarily represent allowable costs incurred by subcontractors thatprimarily relate to waste disposal activities that have not been submitted tothe DOE for payment. These costs cannot be invoiced to the DOE until paymenthas been made by the Company to the subcontractor. The subcontractor will notinvoice the Company until the waste is appropriately disposed of which couldtake up to one year.

The Company’s Contractreceivables result primarily from its long-term Contract with the DOE. Asa consequence, management believes that credit risk is minimal.

**(5)     Employee Incentive Plan**

In connection with theclosure Contract with the DOE, the Company implemented a salaried employee incentiveplan. There are two components to the plan. The first component represents acash bonus, which is earned and paid annually. The second component representsthe issuance of performance units. These units are allocated to employees on anannual basis. The value of these units ultimately depended on the actual costincurred under the Contract. Employees remained eligible for these units aslong as they are employed by the Company or left in good standing, as defined.Payments made for performance units will be paid in cash at the end of theContract.

During 2006, the Companypaid its remaining obligation under the employee incentive plan due to the DOE’sacceptance of physical completion of the Contract. No amounts remain accruedfor this liability as of December 31, 2006.

Additionally, in 2005 theCompany had accrued $3.7 million for an enhanced schedule incentivepayable to the hourly employees represented by United Steel Workers of Americaunder the collective bargaining agreement. This was paid in 2006.

F-29

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**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

Notes toConsolidated Financial Statements

December 31, 2006and 2005

** **

**(6)      Business Loan and Security Agreement**

The Company had aBusiness Loan and Security Agreement (the Agreement) with a bank that expiredon December 31, 2006. The Company, Kaiser, and CH2M HILL granted a firstlien security interest to the bank in all of the ownership and equity interestof the Company. As of December 31, 2006, the Company had no amounts outstandingunder the Agreement. As of December 31, 2005, the Company had $3,000,000outstanding under the Agreement.

**(7)     Contingencies**

The Company’sreimbursable costs are subject to audit in the ordinary course of business byvarious U.S. government agencies. Management is not presently aware of anysignificant costs, which have been, or may be, disallowed by any of theseagencies.

The Company is party to alegal action arising in the normal course of business as a result ofperformance under the Contract. While the outcome of this action is difficultto predict, the Company’s management believes any amounts ultimately assertedagainst the Company for this outstanding claim would be fully reimbursable bythe DOE under the Contract.

**(8)     Employee Benefit Plans**

In accordance with theContract, the Company participated in several multiple employer benefit planscovering substantially all employees who meet length of service requirements.These plans include two defined benefit pension plan and three definedcontribution plans, the latter of which provide for Company matchingcontributions. The Company did not make any contributions to the definedcontribution plans in 2006 and made $450,000 in contributions during 2005.During 2006 and 2005, the Company made combined contributions to the definedbenefit pension plans of $59,409,000 and $36,034,000, respectively.

The Company administeredthese benefit plans with benefits equivalent to the RFETS contractor benefitplans maintained by the contractor that preceded the Company at RFETS. Underthe Contract, the Company recognized the cost of benefit plans when paid, andsuch costs were reimbursed by the DOE. Any excess pension plan assets orunfunded pension plan liability that may currently exist or is remaining at theend of the DOE Contract accrues to or is the responsibility of the DOE. During2006, at the request of the DOE, the Company transferred sponsorship andadministration of these plans to CH2M HILL Hanford Group, an affiliate of CH2MHILL.

F-30

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**Report ofIndependent Registered Public Accounting Firm onFinancial Statement Schedule**

Tothe Board of Directors and

    Shareholders of Kaiser Group Holdings, Inc.

Our audit of the consolidatedfinancial statements referred to in our report dated March 26, 2007 appearingin the 2006 Annual Report to Shareholders of Kaiser Group Holdings, Inc. (whichreport and consolidated financial statements are incorporated by reference inthis Annual Report on Form 10-K) also included an audit of the financial statementschedule for the year ended December 31, 2006 listed in Item 15(a)(2) of thisForm 10-K.  In our opinion, thisfinancial statement schedule presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.

/s/ Stegman & Company

Baltimore, MarylandMarch 26, 2007

S-1

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**Report ofIndependent Registered Public Accounting Firm onFinancial Statement Schedule**

Tothe Board of Directors and

    Shareholders of Kaiser Group Holdings, Inc.

Our audits of the consolidatedfinancial statements referred to in our report dated March 20, 2006 appearingin the 2005 Annual Report to Shareholders of Kaiser Group Holdings, Inc. (whichreport and consolidated financial statements are incorporated by reference inthis Annual Report on Form 10-K) also included an audit of the financialstatement schedule for the years ended December 31, 2005 and 2004 listed inItem 15(a)(2) of this Form 10-K.  In ouropinion, this financial statement schedule presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements.

PricewaterhouseCoopers LLP

March 30, 2007McLean, Virginia

S-2

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**SCHEDULE II —VALUATION AND QUALIFYING ACCOUNTS**

**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES(in thousands)**
| **Column A**                | ** ** | **Column B**                              | ** ** | **Column C**                                            | ** ** | **Column D** | ** ** | **Column E** | ** ** | **Column F**                                 | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|---------------------------------------------------|------------|
| **Description**                  | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to Costs  and Expenses** | ** ** | **Other**         | ** ** | **Deductions**    | ** ** | **Balance at  the End  of Period** | ** ** |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Year Ended December 31,  2006    |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Deducted from asset  account:    |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Contract  Receivable             |       | $                                              | 24,350     |                                                         | $          | 3,273             |       | $                 | —     |                                              | $          | — |   | $ | 27,623 |   |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Year Ended December 31,  2005    |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Deducted from asset  account:    |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Allowance for doubtful  accounts |       | $                                              | 548        |                                                         | $          | —            |       | $                 | (548       | )(1)                                              | $          | — |   | $ | — |   |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Contract  Receivable             |       | 23,048                                         |       | 1,302                                                        |       | —            |       | —            |       | 24,350                                            |       |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
|                             |       | $                                              | 23,596     |                                                         | $          | 1,302             |       | $                 | —     |                                              | $          | — |   | $ | 24,350 |   |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Year Ended December 31,  2004    |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Deducted from asset  account:    |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Allowance for doubtful  accounts |       | $                                              | 548        |                                                         | $          | —            |       | $                 | —     |                                              | $          | — |   | $ | 548 |   |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Contract  Receivable             |       | 23,595                                         |       | —                                                       |       | —            |       | (547              | )          | 23,048                                            |       |
|                             |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
|                             |       | $                                              | 24,143     |                                                         | $          | —            |       | $                 | —     |                                              | $          | (547 | ) | $ | 23,596 |   |

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(1)             Reflects the reversal of the reserve.

S-3

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